Title page for ETD etd-02062003-155912

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
  • revenue management
  • dynamic pricing
  • perishable asset
  • cancellation and refund
  • stochastic demand
Date of Defense 2003-01-24
Availability unrestricted
We 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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