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Robust Timing of Markdowns

Michael Dziecichowicz (mjd404***at***lehigh.edu)
Daniela Caro (dac204***at***lehigh.edu)
Aurelie Thiele (aut204***at***lehigh.edu)

Abstract: We propose an approach to the timing of markdowns over a finite time horizon that does not require the precise knowledge of the underlying probabilities, instead relying on range forecasts for the arrival rates of the demand processes, and that captures the degree of the manager's risk aversion through intuitive budget-of-uncertainty functions. These budget functions bound the cumulative deviation of the arrival rates from their nominal values over the lengths of time for which a product is offered at a given price. A key issue is that using lengths of time as decision variables introduces non-convexities when budget functions are concave; concavity is a common assumption in the robust optimization literature and therefore must be incorporated in a tractable manner. In the single-product case, we describe a tractable and intuitive framework to incorporate uncertainty on customers' arrival rates, formulate the resulting robust optimization model, describe an efficient procedure to compute the optimal sale times, and provide theoretical insights. We then describe how to use the solution of the static robust optimization model to implement a dynamic markdown policy. We also extend the robust optimization approach to multiple products and suggest the idea of constraint aggregation to preserve performance in robust revenue management for this type of problem structure. Numerical results are very encouraging.

Keywords: robust optimization, pricing, markdowns, revenue management

Category 1: Robust Optimization

Category 2: Applications -- OR and Management Sciences (Yield Management )

Citation: Technical report (2010), Lehigh University, Department of Industrial and Systems Engineering, Bethlehem, PA.

Download: [PDF]

Entry Submitted: 11/09/2010
Entry Accepted: 11/09/2010
Entry Last Modified: 12/31/2014

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