A Single-Resource Revenue Management Problem with Random Resource Consumptions

30 Pages Posted: 30 Dec 2010 Last revised: 29 Nov 2011

See all articles by Weifen Zhuang

Weifen Zhuang

affiliation not provided to SSRN

Mehmet Gumus

McGill University - Desautels Faculty of Management

Dan Zhang

affiliation not provided to SSRN

Date Written: December 29, 2010

Abstract

We study a single-resource multi-class revenue management problem where the resource consumption for each class is random and only revealed at departure. The model is motivated by cargo revenue management problems in the airline and other shipping industries. We study how random resource consumption distribution affects the optimal expected profit and identify a preference acceptance order on classes. For a special case where the resource consumption for each class follows the same distribution, we fully characterize the optimal control policy. We then propose two easily computable heuristics: (i) a class-independent heuristic through parameter scaling, and (ii) a decomposition heuristic that decomposes the dynamic programming formulation into a collection of one-dimensional problems. We conduct extensive numerical experiments to investigate the performance of the two heuristics and compared them with several widely studied heuristic policies. Our results show that both heuristics work very well, with class-independent heuristic slightly better between the two. In particular, they consistently outperform heuristics that ignore demand and/or resource consumption uncertainty. Our results demonstrate the importance of considering random resource consumption as another problem dimension in revenue management applications.

Keywords: Revenue management, Dynamic programming, Transportation

Suggested Citation

Zhuang, Weifen and Gumus, Mehmet and Zhang, Dan, A Single-Resource Revenue Management Problem with Random Resource Consumptions (December 29, 2010). Available at SSRN: https://ssrn.com/abstract=1732240 or http://dx.doi.org/10.2139/ssrn.1732240

Weifen Zhuang

affiliation not provided to SSRN ( email )

Mehmet Gumus (Contact Author)

McGill University - Desautels Faculty of Management ( email )

1001 Sherbrooke St. West
Montreal, Quebec H3A1G5 H3A 2M1
Canada

Dan Zhang

affiliation not provided to SSRN ( email )

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