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Optimal Multi-period Pricing with Service Guarantees

Working Paper
  • Christian Borgs
  • Ozan Candogan
  • Jennifer Chayes
  • Ilan Lobel
  • Hamid Nazerzadeh
Conference paper
Part of the Lecture Notes in Computer Science book series (LNCS, volume 7090)

Abstract

We consider the multi-period pricing problem of a service firm facing time-varying capacity levels. Customers are assumed to be fully strategic with respect to their purchasing decisions, and heterogeneous with respect to their valuations, and arrival-departure periods. The firm’s objective is to set a sequence of prices that maximizes its revenue while guaranteeing service to all paying customers. Although the corresponding optimization problem is non-convex, we provide a polynomial-time algorithm that computes the optimal sequence of prices. We show that due to the presence of strategic customers, available service capacity at a time period may bind the price offered at another time period. Consequently, when customers are more patient for service, the firm offers higher prices. This leads to the underutilization of capacity, lower revenues, and reduced customer welfare. Variants of the pricing algorithm we propose can be used in more general settings, such as a robust optimization formulation of the pricing problem.

Copyright information

© Springer-Verlag Berlin Heidelberg 2011

Authors and Affiliations

  • Christian Borgs
    • 1
  • Ozan Candogan
    • 2
  • Jennifer Chayes
    • 1
  • Ilan Lobel
    • 3
  • Hamid Nazerzadeh
    • 4
  1. 1.Microsoft Research New England LabIsrael
  2. 2.Lab for Information and Decision SystemsMassachusetts Institute of TechnologyUSA
  3. 3.Stern School of BusinessNew York UniversityUSA
  4. 4.Marshall School of BusinessUniversity of Southern CaliforniaUSA

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