Comparative analysis of markup and markdown pricing policies in revenue management problems

Abstract

It is a common practice for many industries to bolster sales and revenue through dynamic pricing strategies. For instance, markup pricing is especially prevalent in the commercial airline industry. Meanwhile, for products sold on a seasonal basis, many stores generally decrease their prices toward the end of the season. In this thesis, we compare the expected revenue that can be generated from two representative pricing policies: markup only and markdown only, in a continuoustime single product revenue management model over a finite horizon. In our model, the initial inventory is fixed and there is no replenishment opportunity during the selling period. The demand follows a homogeneous Poisson process whose rate is controlled by price only. The decisions are to select a price from a set of predetermined prices at each time during the selling period. We show that the markdown policy is superior to the markup policy when the inventory level is low and the remaining time is ample; when the remaining time is short, the markup policy is superior. Our findings complement the previous studies in each of these policies and provide valuable insights for practitioners to choose among different pricing strategies. We verify our findings through numerical tests.