Samuel E. Bodily

A taxonomy and research overview of perishable-asset revenue management: yield management, overbooking, and pricing

This paper proposes the term perishable-asset revenue management to denote the field that combines the areas of yield management, overbooking, and pricing for perishable assets. After summarizing the characteristics common to problems in this field, the paper discusses the objectives and constraints faced by decision makers. Then it offers a comprehensive taxonomy with 14 different elements and reviews the research that has been done related to each element. Finally, it suggests some important areas of future research that can help bridge the gap between theory and application.

Note—A Delegation Process for Combining Individual Utility Functions

A delegation process is proposed for setting the weights when a weighted sum of individual utility functions is used to make group decisions. Conditions under which a unique set of weights exist and methods for calculating these weights are obtained using the theory of Markov chains. It is shown that the Pareto optimal set at each step of delegation is a subset of the Pareto optimal set at the previous step.

Perishable-asset revenue management: Generic and multiple-price yield management with diversion

In any situation of fixed capacity and a perishable service or product, firms want to avoid spoilage of the service or product and receive the most revenue possible in the face of uncertain demand. Stimulation of demand from price-sensitive customers, however, through discount prices to customers that reserve early can help fill capacity. This is attractive if non-price-sensitive customers can be prevented from diverting to the lower rates. This paper provides generic results for deciding how many discount units to sell (the so-called yield-management problem) and extends the generic problem in several ways: (1) to situations with continuous, not discrete resources, (2) to treatment of yield management jointly with overbooking, and (3) to problems with diversion with more than two price classes. Simulation studies using airline data suggest that our decision rules perform better than previous rules now used in practice.

Modeling the Customer Arrival Process and Comparing Decision Rules in Perishable Asset Revenue Management Situations

A model for customer arrivals is presented that allows evaluation of different decision rules in perishable asset revenue management (PARM) situations. The model is used to derive probabilities necessary to operationalize the implementation of an optimal decision rule for PARM problems with diversion and two price classes. Heuristic approaches are compared to the proper closing out of price classes to see how much of an improvement can be made in expected contribution. The sensitivity of the difference in expected contribution between these rules is tested relative to changes in the models input parameters. Managerial insights are presented.

Analysis of Risks to Life and Limb

Industrial safety, environmental and health planning, energy policy, and many other areas of public and private management require the comparison of risks to life and limb and the allocation of resources to competing risk-reducing activities. Several issues that must be taken into consideration in evaluating alternatives affecting life and limb are described. A methodology employing multiattribute decision analysis is developed to account for these issues in a consistent way. The methodology combines analysis of an individuals willingness to pay to reduce risks to himself with collective analysis of the value of reducing risks to others. Illustrative applications of the methodology are provided.

A Dialogue Process for Choosing Value-Creating Strategies

A decision process has proven effective in three activities thatare key to value creation: choosing an excellent strategy, actually bringing about change, and operating effectively with the new strategy. The dialogue is between a decision board and the strategy team as they work through six steps of a decision process. This process is focused on alternatives and implementation and is founded in decision analysis. Strategy frame-works and structuring tools are key to assessing the business situation. Risk and value trade-offs are made explicit, leading to concrete proposals to add value and reduce risk. Explicit plans for action are developed as the strategic alternative is chosen. Companies have developed strategy insights using this process, as we illustrate with examples from the pharmaceutical industry.

Multiplicative Utilities for Health and Consumption

Many challenging medical/financial decisions require a decision maker to express preferences for lifetime streams of health and consumption. To express such preferences, we develop two multiplicative utility forms from basic conditions. These forms have many advantages over the leading additive form and extend the way in which life years are adjusted in the popular quality-adjusted life-year model. Unlike additive forms, a decision maker with one of our multiplicative forms can express correlation aversion in consumption streams. In the special case of constant health and consumption streams, our forms reduce to a double exponential utility in life duration. When the decision maker is correlation averse in consumption streams, this form can express risk aversion, decreasing absolute risk aversion and increasing relative risk aversion in life duration. This reduced form under correlation aversion also has standard gamble probabilities (proportional time trade-offs) that increase (decrease) in life duration. In addition, it has standard gamble probabilities that exceed proportional time trade-offs. The properties of this reduced form under correlation seekingness are also examined and discussed in the context of the empirical evidence on attitudes toward risks in life duration, standard gamble probabilities, and proportional time trade-offs.

Structured risk management : filling a gap in decision analysis education

Risk management is a standard management tool that does not generally appear in decision analysis textbooks nor is it explicitly cited as part of the standard decision-analysis paradigm. In contrast, risk management articles and books describe how decision trees can be used to evaluate specific risk management strategies. In this paper we describe a series of steps that should be a routine part of every decision tree analysis. They are designed to assess the expected value of developing a risk management strategy with regard to different aspects of uncertainty. The method is intended to trigger a focused brainstorming session to search for specific strategies to manage targeted risks. The procedure adds structure to the value-enhancing dimension of decision analysis that creates new strategies with less risk and higher expected values. The material presented here can easily be incorporated into even an overview of decision analysis in a survey class of operational research.

Stability, Equality, Balance, and Multivariate Risk

In multiobjective decisions a conflict often arises between reducing multivariate risk, exemplified by correlations among variables, and providing one of the following: stability (in the multiperiod problem) equality (in the multiperson problem) or balance (in the multivariate problem). Additive and multiplicative utility models either do not allow multivariate risk aversion or force a dichotomy between it and stability, equality, or balance. This paper develops a preference model to correct this deficiency. A definition of and conditions for inequality aversion in a measurable multiattribute value function and a measure of local inequality aversion are given as part of this development.

I can't get no satisfaction: How bundling and multi-part pricing can satisfy consumers and suppliers

Bundling and multi-part pricing may save etailers from mortal challenges attacking the music industry. These strategies are attractive to customers, perhaps spelling the difference between pirating and legally purchasing music; they allow “custom pricing” to capture more of the consumer surplus, and just as importantly, they contribute to developing new artists for long-term viability of the music industry. The many ways to bundle include exact firm-selected bundles, category bundling, customer-selected bundles, and mixing these with individual products. Each of these approaches has specific advantages for different market segments, making up for generally lower prices in the competitive online world. Multi-part pricing affords additional opportunities to capture more of the consumer surplus. These ideas are especially relevant to online music because of the ease of packaging products, the low cost of reproducing music on demand, the reduced friction of consumer/firm interaction, the low cost of monitoring complex behavior, and the enhanced measurement of performance. In the online world, content offerings are revitalized when offered as bundles or service packages.