A revenue management problem with a choice model of consumer behaviour in a random environment

Abstract

Modeling consumer behavior is a relevant and growing research area in revenue management. Single-resource (single-leg) capacity control problems comprising consumer choice modeling constitute the backbone of more complicated models. In existing models, the distribution of demand is assumed to be independent of external factors. However, in reality demand may depend on the current external environment which represents the prevailing economic, financial or other factors that affect customer behavior. We formulate a stochastic dynamic program that comprises a discrete choice model of consumer behavior in a randomly fluctuating demand environment with a Markovian structure. We derive some structural results on the optimal policy for capacity control. The model and the results generalize earlier work of Talluri and van Ryzin (Revenue management under a general discrete choice model of consumer behavior. Manag Sci 50(1):15–33 2004b). In particular, the concept of an efficient set of products plays an important rule but such sets may depend on the particular external environment. We also present some computational results which illustrate the structural properties and explore the benefits of explicitly modeling the external environment.