Improving Revenue Management: A Real Option Approach

Abstract

In this article, we apply a real option approach for improving revenue management regarding fluctuating commodity prices and time-varying strike prices in the field of operational research. We also take into account the cyclical nature of commodity prices, which is an important stylized fact in the empirical behavior of commodity prices. Two typical examples are provided to illustrate how real options can be used for enhancing profits and managing risk, which are important in revenue management. Valuation of these real options via a semi-analytical algorithm is also discussed.