Journal Article

Pricing and revenue management: The value of coordination

Management Science 60 (3): 730–752
Ayse Kocabiykoglu, Ioana Popescu, Catalina Stefanescu (2014)
Subject(s): Product and operations management
Keyword(s): Revenue management, pricing, coordination, price-sensitive stochastic demand, hierarchical policies, lost sales rate elasticity

The integration of systems for pricing and revenue management must trade off potential revenue gains against significant practical and technical challenges. This dilemma motivates us to investigate the value of coordinating decisions on prices and capacity allocation in a stylized setting. We propose two pairs of sequential policies for making static decisions—on pricing and revenue management—that differ in their degree of integration (hierarchical versus coordinated) and their pricing inputs (deterministic versus stochastic). For a large class of stochastic, price-dependent demand models, we prove that these four heuristics admit tractable solutions satisfying intuitive sensitivity properties. We further evaluate numerically the performance of these policies relative to a fully coordinated model, which is generally intractable. We find it interesting that near-optimal performance is usually achieved by a simple hierarchical policy which sets prices first, based on a non-nested stochastic model, and then uses these prices to optimize nested capacity allocation. This tractable policy largely outperforms its counterpart based on a deterministic pricing model. Jointly optimizing price and allocation decisions for the high-end segment improves performance, but the largest revenue benefits stem from adjusting prices to account for demand risk.

© 2014 INFORMS

Volume 60
Issue 3
Pages 730–752