The Usage of Opportunity Cost to Maximize Performance in Revenue Management

• 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
• ISSN: 0011-7315; 1540-5915
• DOI: 10.1111/j.1540-5915.2008.00210.x

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.