The Usage of Opportunity Cost to Maximize Performance in Revenue Management

ABSTRACT To meet customer requirements efficiently, a manager needs to supply adequate quantities of products, capacity, or services at the right time with the right prices. Revenue management (RM) techniques can help firms use differential pricing strategies and capacity allocation tactics to maxim...

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Bibliographic Details
Published in:Decision sciences 2008-11, Vol.39 (4), p.737-758
Main Authors: Deng, Honghui, Wang, Qiwen, Leong, G. Keong, Sun, Sherry X.
Format: Article
Language:English
Subjects:
and Stochastic Demand
Capacity Allocation
Cost estimates
Decision making
Heuristic
Heuristics
Management
Opportunity Cost
Opportunity costs
Pricing
Revenue
Revenue Management
Simulation
Stochastic models
Stochastic processes
Studies
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Summary:ABSTRACT To meet customer requirements efficiently, a manager needs to supply adequate quantities of products, capacity, or services at the right time with the right prices. Revenue management (RM) techniques can help firms use differential pricing strategies and capacity allocation tactics to maximize revenue. In this article, we propose a marginal revenue‐based capacity management (MRBCM) model to manage stochastic demand in order to create improved revenue opportunities. The new heuristic employs opportunity cost estimation logic that is unique and is the reason for the increased performance. The MRBCM model generates order acceptance policies that allocate available capacity to higher revenue generating market segments in both service and manufacturing environments. To evaluate these models, we design and conduct simulation experiments for 64 scenarios using a wide range of operating conditions. The experimental results show that the MRBCM model generates significantly higher revenues over the first come, first served rule when capacity is tight. In addition, we also show that the MRBCM model generally performs better than a recent RM model published in the literature.
ISSN:0011-7315
1540-5915
DOI:10.1111/j.1540-5915.2008.00210.x