Correspondence: Darius Walczak, ¹PROS Revenue Management, 3100 Main Street, Suite 900, Houston, TX 77002, USA. Tel: +1 713 335 5151; E-mail: info@prosrm.com

¹Darius Walczak is a senior scientist at PROS Revenue Management in Houston, Texas. He is the manager of PROS' Optimization Engine. Darius holds a PhD degree in Commerce and Business Administration (Operations & Logistics) from Sauder Business School, University of British Columbia in Vancouver, BC along with Master's degrees in Mathematics from UBC and Applied Mathematics from Wroclaw University of Technology. His research focuses on Revenue Management, Pricing Optimization and Dynamic Programming.

Received 11 May 2006.

Abstract

Practitioners sometimes show reluctance to apply DP models in Revenue Management citing difficulty in modeling high-variance, real-life customer demand. We propose a method to address that issue by suitably increasing variance in a popular Poisson demand model and then slightly generalizing the DP formulation while keeping desired structural properties intact. We include numerical examples for a discrete-time approximation to Poisson-distributed demand.