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Optimal static pricing for a tree network

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  • Felipe Caro
  • David Simchi-Levi

Abstract

We study the static pricing problem for a network service provider in a loss system with a tree structure. In the network, multiple classes share a common inbound link and then have dedicated outbound links. The motivation is from a company that sells phone cards and needs to price calls to different destinations. We characterize the optimal static prices in order to maximize the steady-state revenue. We report new structural findings as well as alternative proofs for some known results. We compare the optimal static prices versus prices that are asymptotically optimal, and through a set of illustrative numerical examples we show that in certain cases the loss in revenue can be significant. Finally, we show that static prices obtained using the reduced load approximation of the blocking probabilities can be easily obtained and have near-optimal performance, which makes them more attractive for applications. Copyright Springer Science+Business Media, LLC 2012

Suggested Citation

  • Felipe Caro & David Simchi-Levi, 2012. "Optimal static pricing for a tree network," Annals of Operations Research, Springer, vol. 196(1), pages 137-152, July.
    • Handle: RePEc:spr:annopr:v:196:y:2012:i:1:p:137-152:10.1007/s10479-012-1115-4
    DOI: 10.1007/s10479-012-1115-4
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    References listed on IDEAS

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    1. Arie Harel, 1990. "Convexity Properties of the Erlang Loss Formula," Operations Research, INFORMS, vol. 38(3), pages 499-505, June.
    2. E. Carrizosa & E. Conde & M. Muñoz-Márquez, 1998. "Admission Policies in Loss Queueing Models with Heterogeneous Arrivals," Management Science, INFORMS, vol. 44(3), pages 311-320, March.
    3. Serhan Ziya & Hayriye Ayhan & Robert D. Foley, 2008. "A note on optimal pricing for finite capacity queueing systems with multiple customer classes," Naval Research Logistics (NRL), John Wiley & Sons, vol. 55(5), pages 412-418, August.
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