Type of Document Master's Thesis Author An, Kwan-Ang URN etd-02062003-155912 Title Dynamic Pricing with Early Cancellation and Resale Degree Master of Science Department Industrial and Systems Engineering Advisory Committee
Advisor Name Title Lin, Kyle Y. Committee Chair Bish, Ebru K. Committee Member Nachlas, Joel A. Committee Member Keywords
- revenue management
- dynamic pricing
- perishable asset
- cancellation and refund
- stochastic demand
Date of Defense 2003-01-24 Availability unrestricted AbstractWe consider a continuous time dynamic pricing model where a seller needs to sell a single item over a finite
time horizon. Customers arrive in accordance with a Poisson process. Upon arrival, a customer either purchases
the item if the posted price is lower than his/her reservation price, or leaves empty-handed. After purchasing
the item, some customers, however, will return the item to the seller at an exponential rate for a full refund.
We assume that a returned item is in mint condition and the seller can resell it to future customers. The
objective of the seller is to dynamically adjust the price in order to maximize the expected total revenue when
the sale horizon ends. We formulate the dynamic pricing problem as a dynamic programming model and derive the
structural properties of the optimal policy and the optimal value function. For cases in which the customer's
reservation price is exponentially distributed, we derive the optimal policy in a closed form. For general
reservation price distribution, we consider an approximation of the original model by discretizing both time and
the allowable price set. We then present an algorithm for numerically computing the optimal policy in this
discrete time model. Numerical examples show that if the discrete price set is carefully chosen, the expected
total revenue is nearly the same as that when the allowable price set is continuous.
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