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Value-at-risk optimal policies for revenue management problems

Research output: Contribution to journalJournal article

Published
<mark>Journal publication date</mark>08/2015
<mark>Journal</mark>International Journal of Production Economics
Volume166
Number of pages9
Pages (from-to)11-19
Publication StatusPublished
Early online date11/04/15
<mark>Original language</mark>English

Abstract

Abstract Consider a single-leg dynamic revenue management problem with fare classes controlled by capacity in a risk-averse setting. The revenue management strategy aims at limiting the down-side risk, and in particular, value-at-risk. A value-at-risk optimised policy offers an advantage when considering applications which do not allow for a large number of reiterations. They allow for specifying a confidence level regarding undesired scenarios. We introduce a computational method for determining policies which optimises the value-at-risk for a given confidence level. This is achieved by computing dynamic programming solutions for a set of target revenue values and combining the solutions in order to attain the requested multi-stage risk-averse policy. We reduce the state space used in the dynamic programming in order to provide a solution which is feasible and has less computational requirements. Numerical examples and comparison with other risk-sensitive approaches are discussed.