Mathematical and computational approaches to revenue management

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Revenue management is the study of deciding how a firm should decide on prices and inventory levels in order to optimize some quantities,usually revenue or profit. The classical example is an airline which must decide on the price it is going to charge for tickets, let us say for a flight from Toronto to Vancouver. The process of selling ticketsusually starts at least six months before the date of departure. One approach is for the airline to sell the tickets fairly cheaply as soon as possible in order to make sure that all tickets are sold since an unsold ticket is worthless as soon as the plane departs. However, business people often require a ticket with very little warning closeto the departure date. These tickets can be sold for a much higher price, so the question is what is the optimal price structure as afunction of time. This is a complex problem especially since a realistic demand model usually will contain a stochastic term. Thistype of analysis can be applied to many different products and services, for which the good cannot be stored.