Revenue Management: A Real Options Approach

Revenue management is the process of actively managing inventory or capacity to maximize revenues. The active management typically occurs through managerial levers such as price, promotion or availability. We present a novel real options approach to revenue management that is specifically suited to the car rental business. We illustrate the concept with actual car rental data. The model produces minimally acceptable prices and inventory release quantities (number of cars available for rent at a given price) as a function of remaining time and available inventory. The pricing and inventory release recommendations of the developed model confirm earlier empirical analysis that suggested current practises discount too deeply early in the booking cycle.