Pricing Strategies With Reference Effects In Revenue Management Settings

In recent years, revenue management has been adopted in a wide range of industries such as transportation, health care, advertising and e-commerce besides its great success in those traditional applications represented by airlines, hotels and rental car industries. Meanwhile, the theoretical methods and key technologies of revenue management have come to mature and sophisticated. The current revenue management researches mostly characterize customers’ demand exogenously, ignoring the characteristics of their purchasing behaviors, which may reduce the efficiency of revenue management methods. This paper considers customers’ bounded rationality purchasing behavior, focusing on dynamic pricing decision with reference dependence under revenue management circumstances, based on prospect theory, optimal control theory and stochastic dynamic programming theory. We substitute demand functions with reference effect for those based on the assumption that customers are myopic, in which demand distribution function with willingness to pay (WTP) and deterministic demand function are considered.Four problems mainly constitute this paper:1) the definition and expression of reference effect,2) the dynamic pricing policy with static reference price under multiplicative reference effect,3) periodic pricing review policy with dynamic reference price under additive reference effect and 4) the stochastic dynamic programming policy with dynamic reference price under additive reference effect. For the first problem, we compare static reference effect and the dynamic reference effect, and describe the additive and multiplicative reference effect. We verify the general rules of reference dependence acting on customers’purchasing behavior. For the second problem, we construct a price model with continuous time based on static reference price, analyzing the pricing strategies under static reference effect by obtaining the closed-form solution. For the last two problems, we establish two different pricing models with discrete time based on dynamic reference effect respectively, providing the solving methods by which we explore the relationship between dynamic reference effect and the pricing strategies.The study shows that the markup policy is effective in high demand situation and the markdown policy is effective in low demand situation. Besides, under the effect of static reference price, the enterprises should adopt price-oriented strategies in situations with low demand and demand-oriented strategies in situations with high demand. Under the effect of dynamic reference price, a higher initial price is preferable in stochastic dynamic programming settings. In addition, we analyze the influence of reference effect on the initial price, the price direction, the price dispersion and the revenue of the enterprise. Numerical experiments show that the reference effect has both positive and negative aspects to the enterprise. Appropriate pricing strategies and updating policies are adopted to increase the effectiveness of dynamic pricing strategy.