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Dynamic Bid Prices in Revenue Management

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  • Daniel Adelman

    (Graduate School of Business, University of Chicago, Chicago, Illinois 60637)

Abstract

We formally derive the standard deterministic linear program (LP) for bid-price control by making an affine functional approximation to the optimal dynamic programming value function. This affine functional approximation gives rise to a new LP that yields tighter bounds than the standard LP. Whereas the standard LP computes static bid prices, our LP computes a time trajectory of bid prices. We show that there exist dynamic bid prices, optimal for the LP, that are individually monotone with respect to time. We provide a column generation procedure for solving the LP within a desired optimality tolerance, and present numerical results on computational and economic performance.

Suggested Citation

  • Daniel Adelman, 2007. "Dynamic Bid Prices in Revenue Management," Operations Research, INFORMS, vol. 55(4), pages 647-661, August.
    • Handle: RePEc:inm:oropre:v:55:y:2007:i:4:p:647-661
    DOI: 10.1287/opre.1060.0368
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    References listed on IDEAS

    as
    1. William L. Cooper, 2002. "Asymptotic Behavior of an Allocation Policy for Revenue Management," Operations Research, INFORMS, vol. 50(4), pages 720-727, August.
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    4. Kalyan Talluri & Garrett van Ryzin, 1998. "An Analysis of Bid-Price Controls for Network Revenue Management," Management Science, INFORMS, vol. 44(11-Part-1), pages 1577-1593, November.
    5. Jeffrey I. McGill & Garrett J. van Ryzin, 1999. "Revenue Management: Research Overview and Prospects," Transportation Science, INFORMS, vol. 33(2), pages 233-256, May.
    6. Dimitris Bertsimas & Sanne de Boer, 2005. "Simulation-Based Booking Limits for Airline Revenue Management," Operations Research, INFORMS, vol. 53(1), pages 90-106, February.
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