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Concavity and Unimodality of Expected Revenue Under Discrete Willingness to Pay Distributions
Author(s) -
Ninh Anh,
Shen ZuoJun Max,
Lariviere Martin A.
Publication year - 2020
Publication title -
production and operations management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 3.279
H-Index - 110
eISSN - 1937-5956
pISSN - 1059-1478
DOI - 10.1111/poms.13138
Subject(s) - unimodality , revenue , revenue management , function (biology) , profit (economics) , discrete time and continuous time , mathematical optimization , marginal revenue , computer science , willingness to pay , economics , mathematical economics , microeconomics , mathematics , finance , statistics , evolutionary biology , biology
Most pricing and revenue management models have at their core an optimization problem; one needs to determine the optimal price or quantity to maximize a profit or revenue function. To ensure tractability, conditions that assure the objective function has a unique solution are enormously helpful. So far, several technical assumptions have been proposed for the continuous case, but comparatively little attention has been given to the discrete counterpart despite its prevalence in practice. Thus, this study aims to develop new technical assumptions, built upon relevant economic concepts, to guarantee the tractability of revenue management models in discrete settings. In particular, we present two sufficient conditions for the revenue function to be concave, in terms of quantity or price and propose a condition for the revenue function to be unimodal, called discrete increasing generalized failure rate (IGFR). Our definition has an appropriate economic interpretation and offers comparable properties to those of the continuous version. Finally, we show the discrete IGFR property holds for several discrete distributions.