Meissner, Joern and Strauss, Arne. (2012) Improved bid prices for choice-based network revenue management. European Journal of Operational Research, 217 (2). pp. 417-427. ISSN 0377-2217

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Abstract

One of the latest developments in network revenue management (RM) is the incorporation of customer purchase behavior via discrete choice models. Many authors presented control policies for the booking process that are expressed in terms of which combination of products to offer at a given point in time and given resource inventories. However, in many implemented RM systems—most notably in the hotel industry—bid price control is being used, and this entails the problem that the recommended combination of products as identified by these policies might not be representable through bid price control. If demand were independent from available product alternatives, an optimal choice of bid prices is to use the marginal value of capacity for each resource in the network. But under dependent demand, this is not necessarily the case. In fact, it seems that these bid prices are typically not restrictive enough and result in buy-down effects.

We propose (1) a simple and fast heuristic that iteratively improves on an initial guess for the bid price vector; this first guess could be, for example, dynamic estimates of the marginal value of capacity. Moreover, (2) we demonstrate that using these dynamic marginal capacity values directly as bid prices can lead to significant revenue loss as compared to using our heuristic to improve them. Finally, (3) we investigate numerically how much revenue performance is lost due to the confinement to product combinations that can be represented by a bid price.

The heuristic is not restricted to a particular choice model and can be combined with any method that provides us with estimates of the marginal values of capacity. In our numerical experiments, we test the heuristic on some popular networks examples taken from peer literature. We use a multinomial logit choice model which allows customers from different segments to have products in common that they consider to purchase. In most problem instances, our heuristic policy results in significant revenue gains over some currently available alternatives at low computational cost.

Item Type:	Journal Article
Subjects:	H Social Sciences > HF Commerce
Divisions:	Faculty of Social Sciences > Warwick Business School > Operational Research & Management Sciences Faculty of Social Sciences > Warwick Business School
Journal or Publication Title:	European Journal of Operational Research
Publisher:	Elsevier Science BV
ISSN:	0377-2217
Official Date:	1 March 2012
Volume:	217
Number:	2
Page Range:	pp. 417-427
Identification Number:	10.1016/j.ejor.2011.09.028
Status:	Peer Reviewed
Publication Status:	Published
Access rights to Published version:	Restricted or Subscription Access
URI:	http://wrap.warwick.ac.uk/id/eprint/50092

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