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Revenue management with two market segments and reserved capacity for priority customers

Part of: Stochastic processes

Published online by Cambridge University Press:  01 July 2016

Y Feng  and
B. Xiao
Y Feng*
Affiliation:
National University of Singapore
B. Xiao*
Affiliation:
Long Island University
*
∗ Postal address: Enron Corp., 1400 Smith St., Houston, TX 77002-7361, USA. Email address: youyi.feng@enron.com
∗∗ Postal address: Department of Management, Long Island University, C.W. Post, Brookville, NY 11548, USA. Email address: bxiao@liu.edu
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Abstract

This paper studies a revenue management problem in which a finite number of substitutable commodities are sold to two different market segments at respective prices. It is required that a certain number of commodities are reserved for the high-price segment to ensure a minimum service level. The two segments are served concurrently at the beginning of the season. To improve revenues, management may choose to close the low-price segment at a time when the chance of selling all items at the high price is promising. The difficulty is determining when such a decision should be made. We derive the exact solution in closed form using the theory of optimal stopping time. We show that the optimal decision is made in reference to a sequence of thresholds in time. These time thresholds take both remaining sales season and inventory into account and exhibit a useful monotone property.

Keywords

Point processyield managementmartingaleoptimal stopping times

MSC classification

Primary: 60G55: Point processes
Secondary: 60G40: Stopping times; optimal stopping problems; gambling theory
Type
General Applied Probability
Information
Advances in Applied Probability , Volume 32 , Issue 3 , September 2000 , pp. 800 - 823
Copyright
Copyright © Applied Probability Trust 2000 

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Footnotes

This research was partly supported by Grant RP3950663 of the National University of Singapore.

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