Time：14：00-16：00, April 18th

Venue： Room 208, Tongji Build A

Topic：When to Offer Upgrades? 

Abstract: In this paper, we build a capacity and revenue management model from a consulting project. We consider a firm that sells multiple product models corresponding to multiple classes of demand (customers). Each class of customers requests for one particular product model, and the firm can offer customers free upgrades to more expensive models when there is insufficient stock of the preferred ones. However, customers may not accept the upgrades due to their preferences on their desired models. Customers arrive over time. The firm needs to decide whether or not to offer upgrades upon the arrival of each individual customer. We formulate the problem using a Markov decision process model and prove that the optimal profit function is anti-multimodular. Based on this property, we prove that the structure of the optimal upgrade policy can be described by dynamic thresholds that depend on the inventory levels of all products. Importantly, we show that, with the possibility that customers would reject upgrades, it is optimal to offer upgrades before the stockout of the desired models. Offering upgrades only after stockout could lead to significant profit loss.

Bio: Rowan Wang is an Assistant Professor of Operations Management in the Lee Kong Chain School of Business at the Singapore Management University (SMU). Rowan’s research interests include supply chain management, manufacturing and service operations, production and inventory systems, and queueing systems. His work has been published in journals such as Manufacturing & Service Operations Management.