Revenue Management with Flexible Products

Download or read book Revenue Management with Flexible Products written by Jochen Gönsch and published by . This book was released on 2014 with total page 42 pages. Available in PDF, EPUB and Kindle. Book excerpt: A major benefit of flexible products is that they allow for supply-side substitution even after they have been sold. This helps improve capacity utilization and increase the overall revenue in a sto-chastic environment. As several authors have shown, flexible products can be incorporated into the well-known deterministic linear program (DLP) of revenue management's capacity control. In this paper, we show that flexible products have an additional “value of flexibility” due to their supply-side substitution possibilities, which can be captured monetarily. However, the DLP-based approaches proposed so far fail to capture this value and, thus, steadily undervalue flexible products, resulting in lower overall revenues. To take the full potential of flexible products into account, we propose a new approach that systematically increases the revenues of flexible products when solving the DLP and performing capacity control. A mathematical function of variables available during the booking horizon represents this artificial markup and adapts dynamically to the current situation. We determine the function's parameters using a standard simulation-based optimization method. Numerical experiments show that the benefits of the new approach are biggest when low value demand arrives early. Revenues are improved by up to 5% in many settings.