REVENUE MANAGEMENT: MODELS AND METHODS Kalyan T. Talluri ICREA and Universitat Pompeu Fabra Department of Economics and Business Jaume I Building, Ramon Trias Fargas, 25-27 08005 Barcelona, SPAIN Garrett J. van Ryzin Columbia University Graduate School of Business 3022 Broadway, New York, NY 10027, U.S.A. Itir Z. Karaesmen University of Maryland Robert H. Smith School of Business 4357 Van Munching Hall College Park, MD 20742, U.S.A. Gustavo J. Vulcano New York University Leonard N. Stern School of Business 44 West 4th Street, Suite 8-76 New York, NY 10012, U.S.A. ABSTRACT Revenue management is the collection of strategies and tactics firms use to scientifically manage demand for their products and services. The practice has grown from its origins in airlines to its status today as a mainstream busi- ness practice in a wide range of industry areas, including hospitality, energy, fashion retail, and manufacturing. This article provides an introduction to this increasingly impor- tant subfield of operations research, with an emphasis on use of simulation. Some of the contents are based on ex- cerpts from the book The Theory and Practice of Revenue Management (Talluri and van Ryzin 2004a), written by the first two authors of this article. 1 INTRODUCTION Every seller of a product or service faces a number of fundamental decisions. You want to sell at a time when market conditions are most favorable, but who knows what the future might hold? You want the price to be right—not so high that you put off potential buyers and not so low that you lose out on potential profits. You would like to know how much buyers value your product, but more often than not you must just guess at this number. Businesses face even more complex selling decisions. For example, how can a firm segment buyers by providing different conditions and terms of trade that profitably exploit their different buying behavior or willingness to pay? How can a firm design products to prevent cannibalization across segments and channels? Once it segments customers, what prices should it charge each segment? If the firm sells in different channels, should it use the same price in each channel? How should prices be adjusted over time based on seasonal factors and the observed demand to date for each product? If a product is in short supply, to which segments and channels should it allocate the products? How should a firm manage the pricing and allocation decisions for products that are complements (seats on two connecting airline flights) or substitutes (different car categories for rentals)? Revenue management (RM) is concerned with the methodology and systems required to make demand- management decisions, which can be categorized into (i) Structural decisions: Which selling format to use (such as posted prices, negotiations or auctions); which segmentation or differentiation mechanisms to use (if any); which terms of trade to offer (including volume discounts and cancelation or refund options); how to bundle products; and so on. (ii) Price decisions: How to set posted prices, individual- offer prices, and reserve prices (in auctions); how to price across product categories; how to price over time; how to markdown (discount) over the product lifetime; and so on. (iii) Quantity decisions: Whether to accept or reject an offer to buy; how to allocate output or capacity to different segments, products or channels; when to withhold a product from the market and sale at later points in time; and so on. Which of these decisions is most important in any given business depends on the context. The timescale of the decisions varies as well. Structural decisions about which mechanism to use for selling and how to segment and bundle products are normally strategic decisions taken relatively 145 978-1-4244-2708-6/08/$25.00 ©2008 IEEE Proceedings of the 2008 Winter Simulation Conference S. J. Mason, R. R. Hill, L. Mönch, O. Rose, T. Jefferson, J. W. Fowler eds.