Pricing and Revenue Management for Perishable Assets

Any asset that loses value over time is perishable. Clearly, fruits, vegetables, and pharmaceuticals are perishable, but this list also includes products such as computers and cell phones that lose value as new models are introduced. High-fashion apparel is perishable because it cannot be sold at full price once the season is past. Perishable assets also include all forms of production, transportation, and storage capacity that is wasted if not fully utilized. Unused capacity fiom the past has no value. Thus, all unused capacity is equivalent to perished capacity. 

Another example of revenue management for a perishable asset is the use of overbooking by the airline industry. An airplane seat loses all value once the plane takes off. Given that people often do not show up for a flight even when they have a reservation, airlines sell more reservations than the capacity of the plane, to maximize expected revenue. 

The following are two revenue management tactics used for perishable assets  

Vary price dynamically over time to maximize expected revenue. 

This is a linear demand curve, but in general the demand curve need not be linear. We present the linear case here because it is easier to understand and solve. The assumption is that customers that purchase in the initial periods are less price sensitive, whereas those that purchase later are more price sensitive. The retailer wants to vary the price over time to maximize the revenue it can extract from the Q units it has on hand at the beginning of the season. The dynamic pricing problem faced by the retailer can then be formulated as follows  

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