A two-stage bid-price control for make-to-order revenue management

Capacity control implementations in make-to-order (MTO) revenue management typically are based on bid-prices, which are used to approximate the opportunity cost of accepting a customer request. However, in the face of stochastic demand, this approximation becomes less accurate and the performance of bid-prices may deteriorate. To address this problem, we examine the informational dynamics inherent in MTO capacity control problems and propose a two-stage capacity control approach based on bid-price updates. Updating is realized with neural networks, which are applied to adjust the selection criteria during the booking period with respect to online demand information. Not only is the resulting contribution margin positively influenced by the update, but also the downside risk of performing worse than a naive first-come-first-served policy. Results from computational experiments show that the proposed approach dominates traditional revenue management methods like randomized linear programming with and without resolving in expected contribution margin as well as in risk. Highlights? We propose a two-stage capacity control approach based on bid-price updates. ? Updating is realized with neural networks. ? Results from a computational analysis are reported. ? The control outperforms randomized linear programming with and without resolving. ? The risk of falling below the results of FCFS is reduced.