Structural properties of Markov modulated revenue management problems

• Published in: European journal of operational research 2013-03, Vol.225 (2), p.324-331
• Main Authors: Özkan, Can, Karaesmen, Fikri, Özekici, Süleyman
• Format: Article
• Language: English
• Subjects: Decision making models; Demand; Dynamic programming; Economics; Management decisions; Marketing; Markov analysis; Markov modulation; Markov processes; Mathematical models; Optimization techniques; Policies; Revenue; Revenue management; Revenues; Studies; Thresholds
• ISSN: 0377-2217; 1872-6860
• DOI: 10.1016/j.ejor.2012.09.020

► We model the dependence of demand on the external environment. ► We obtain structural results on the optimal admission control policy. ► We obtain results on the optimal policy when the problem parameters are varied. ► We partially characterize optimal pricing policies with environment-dependent demand. The admission decision is one of the fundamental categories of demand-management decisions. In the dynamic model of the single-resource capacity control problem, the distribution of demand does not explicitly depend on external conditions. However, in reality, demand may depend on the current external environment which represents the prevailing economic, financial, social or other factors that affect customer behavior. We formulate a Markov Decision Process (MDP) to maximize expected revenues over a finite horizon that explicitly models the current environment. We derive some structural results of the optimal admission policy, including the existence of an environment-dependent thresholds and a comparison of threshold levels in different environments. We also present some computational results which illustrate these structural properties. Finally, we extend some of the results to a related dynamic pricing formulation.