Revenue Management with End-of-Period Discounts in the Presence of Customer Learning
Article first published online: 20 JUN 2011
© 2011 Production and Operations Management Society
Production and Operations Management
Volume 21, Issue 1, pages 69–84, January-February 2012
How to Cite
Ovchinnikov, A. and Milner, J. M. (2012), Revenue Management with End-of-Period Discounts in the Presence of Customer Learning. Production and Operations Management, 21: 69–84. doi: 10.1111/j.1937-5956.2011.01243.x
- Issue published online: 5 JAN 2012
- Article first published online: 20 JUN 2011
- History: Received: September 2009; Accepted: December 2010 by Costis Maglaras, after 2 revisions.
- revenue management;
- customer learning;
- strategic consumers
Consider a firm that sells identical products over a series of selling periods (e.g., weekly all-inclusive vacations at the same resort). To stimulate demand and enhance revenue, in some periods, the firm may choose to offer a part of its available inventory at a discount. As customers learn to expect such discounts, a fraction may wait rather than purchase at a regular price. A problem the firm faces is how to incorporate this waiting and learning into its revenue management decisions. To address this problem we summarize two types of learning behaviors and propose a general model that allows for both stochastic consumer demand and stochastic waiting. For the case with two customer classes, we develop a novel solution approach to the resulting dynamic program. We then examine two simplified models, where either the demand or the waiting behavior are deterministic, and present the solution in a closed form. We extend the model to incorporate three customer classes and discuss the effects of overselling the capacity and bumping customers. Through numerical simulations we study the value of offering end-of-period deals optimally and analyze how this value changes under different consumer behavior and demand scenarios.