Abstract
The purpose of this paper is to investigate the optimal pricing strategies with reference effects in revenue management settings. We firstly propose a static pricing model with the properties of stochastic demand, finite horizon and fixed capacity, and prove the existence and uniqueness of the solution. Secondly, we extend the fixed pricing model to a periodic pricing model and incorporate a memory-based reference price in the demand function to investigate how the reference effect impacts on traditional revenue management decisions. We present numerical examples in both low demand situations and high demand situations for different levels of reference effects and different updating frequencies. The results show that the dynamic pricing strategies are superior to a static one even when reference effects are taken into consideration. We also provide some manage-rial insights including pricing directions, pricing dispersion and the optimal updating frequency for both demand situations.
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