A Framework for Estimating Benefits of Using Auctions in Revenue Management

Tim Baker
Department of Management & Decision Sciences, Washington State University, 2710 University Drive, CIC 125N, Richland, WA 99352-1671, bakert@tricity.wsu.edu

Nagesh N. Murthy
Georgia Institute of Technology, The DuPree College of Management, 5 Ferst Drive, Atlanta, GA 30332, nagesh.murthy@mgt.gatech.edu

ABSTRACT. We develop a stochastic model to explore the benefits of incorporating auctions in revenue management. To the best of our knowledge the extant literature on modeling in revenue management has not considered auctions. We consider three models, namely, a traditional fixed price (non-auction) model, a pure auction model, and a hybrid auction model and evaluate their revenue performance under a variety of conditions. The hybrid approach outperforms the other two in all 24 scenarios and yields an average revenue increase of 16.1% over the next best. A surprise finding is that there is no significant difference between the performance of the fixed price and pure auction approaches. A sensitivity analysis reveals that the relative superiority of the hybrid revenue management strategy is reasonably robust.

Subject Areas: Pricing, Revenue Management, and Service Operations.