Type of Publication: Article in Journal
Risk-Averse Dynamic Pricing using Mean-Semivariance Optimization
- Schlosser, R.; Gönsch, J.
- Title of Journal:
- European Journal of Operational Research
- Volume (Publication Date):
- 310 (2023)
- Number of Issue:
- Revenue managementRisk managementMarkov decision processMean-semivariance optimizationDynamic pricing
- Digital Object Identifier (DOI):
- Link to complete version:
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In many revenue management applications risk-averse decision-making is crucial. In dynamic settings, however, it is challenging to find the right balance between maximizing expected rewards and avoiding poor performances. In this paper, we consider time-consistent mean-semivariance (MSV) optimization for dynamic pricing problems within a discrete MDP framework, which are shown to be NP hard. We present a novel fixpoint-based dynamic programming approach to compute risk-sensitive feedback policies with Pareto-optimal combinations of mean and semivariance. We illustrate the effectiveness and the applicability of our concepts compared to state-of-the-art heuristics. For various numerical examples the results show that our approach clearly outperforms all other heuristics and obtains a performance guarantee with less then 0.2% optimality gap. Our approach is general and can be applied to MDPs beyond dynamic pricing.