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Price Guarantees in Dynamic Pricing and Revenue Management

School of Business, Queen’s University, Kingston, Ontario, Canada K7L 3N6
School of Business, Queen’s University, Kingston, Ontario, Canada K7L 3N6
School of Business, Queen’s University, Kingston, Ontario, Canada K7L 3N6
ylevin{at}business.queensu.ca
jmcgill{at}business.queensu.ca
mnediak{at}business.queensu.ca

We present a new model for revenue management of product sales that incorporates both dynamic pricing and a price guarantee. The guarantee provides customers with compensation if, prior to a fixed future date, the price of the product drops below a level specified at the time of purchase. We consider the problem of simultaneously determining optimal dynamic price and guarantee policies for items from a fixed stock when demand depends both on the price and on the parameters of the price guarantee. The model can be used for pricing any items with limited availability over a fixed time horizon. We formulate this model as a discrete-time optimal control problem, prove the existence of its optimal solution, explore some of the structural properties of the solution, present lower-bounding heuristics for solving the problem, and report numerical results.

Subject classifications: inventory/production; perishable/aging items; marketing/pricing; uncertainty; dynamic programming/optimal control; applications; probability; stochastic model applications; programming; nonlinear.
History: Received June 2005; revision received January 2006; accepted February 2006.