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to appear in Management Science

manuscript XXX
Revenue Management with Limited Demand
Information
Yingjie Lan, Huina Gao, Michael Ball*, Itir Karaesmen
Robert H. Smith School of Business, University of Maryland, College Park, MD 20742
*Corresponding author
{ylan, hgao, mball, ikaraes} @ rhsmith.umd.edu
In this paper, we consider the classical multi-fare, single resource (leg) problem in revenue management
for the case where demand information is limited. Our approach employs a competitive analysis, which
guarantees a certain performance level under all possible demand scenarios. The only information required
about the demand for each fare class is lower and upper bounds. We consider both competitive ratio and
absolute regret performance criteria. For both performance criteria, we derive the best possible static policies,
whose booking limits remain constant throughout the booking horizon. The optimal policies have the form
of nested booking limits. Dynamic policies, whose booking limits may be adjusted at any time based on the
history of bookings, are also obtained. We provide extensive computational experiments and compare our
methods to existing ones. The results of the experiments demonstrate the eectiveness of these new robust
methods.
Key words : revenue management, robust optimization, competitive analysis
History : submitted July 28, 2006; revised March 2007; revised July 2007; revised December 2007
1. Introduction
The majority of successful revenue management (RM) implementations rely heavily on the use
of demand information. Experts advise against rushing to optimization in RM without rst fully
implementing accurate demand forecasting systems (Lahoti, 2002). Likewise, research models
require a reasonably accurate characterization of demand to optimize revenues. This requirement
can be met in situations where demand patterns are stable and historical demand information is
available. On the other hand, in the case of new products or situations where, for a variety of rea-
sons, demand patterns might deviate substantially from past history, characterization of demand
is dicult, if not impossible.
Lennon (2004) mentions lack of data and naive forecasts based on inadequate data as two
important factors limiting the realistic application of RM within new industries. Even in the
1
Y.Lan, H.Gao, M.Ball, I.Karaesmen: Revenue Management with Limited Demand Information
2 to appear in Management Science; manuscript no. XXX
airline and hospitality industries where RM has been eectively used for decades, these two factors
commonly cause problems for new products (e.g., new routes own by an airline, new properties
added to a hotel chain). Especially in the hotel industry where franchising is very common, the
diculty with new products is more pronounced: A major hotel company reports signing 200-300
new franchise contracts in the rst half of 2005 (hotel-online.com, 2005). While new properties
added to the system may be similar to existing ones in terms of market and demand characteristics,
franchising agreements or anti-trust laws (because some properties compete in the same market)
may prohibit sharing of demand information. Hence, the hotel chain may not eectively use its
well-established RM system at least in the rst year for new developments. On the other hand,
RM of even old products in airlines and hotels is not easy; obtaining high quality aggregate or
disaggregate forecasts from censored data remains a challenge (see, for example, Weatherford and
Polt, 2002).
Despite the need for robust methods and approaches that do not rely heavily on demand infor-
mation, research in that direction has been scarce. Traditional research models and analyses rely
on several restrictive and possibly unrealistic assumptions about demand such as independence
and stationarity (see Talluri and van Ryzin, 2004a). In this paper, we consider the classical sin-
gle resource (leg) problem in RM and provide alternative forms of controlling the bookings when
demand information is limited. We do not make any assumptions about the demand or the arrival
process beyond upper and lower bounds, and do not need a risk neutrality assumption. Our
approach relies on competitive analysis of online algorithms and we call the policies derived based
on competitive analysis robust since they guarantee a certain performance level under all possible
demand scenarios. We focus on cases where the only information available is lower/upper bounds
on demand. In many practical cases, lower and upper bounds on demand are easier to obtain than
a probability distribution of demand or a characterization of an arrival process over time.
Our contributions can be summarized as follows. We propose new static and dynamic booking
control policies for the single-leg, multiple-fare class problem when only upper/lower bounds on
demand are available. We formulate two dierent models that dier in their objective functions.
Y.Lan, H.Gao, M.Ball, I.Karaesmen: Revenue Management with Limited Demand Information
to appear in Management Science; manuscript no. XXX 3
The rst model maximizes the competitive ratio (a measure related to relative regret) and the
second minimizes the maximum absolute regret. We show that these two models can be analyzed
in a unied manner and we obtain closed-form optimal solutions for both. The resulting optimal
booking control policies preserve the nesting structure that is widely used in practice. We also show
that the optimal booking limits obtained under the absolute regret criterion are no greater than
the ones obtained under the competitive ratio. Based on computational experiments, we show that
the average revenues obtained by our policies are comparable to other well-known procedures even
though our policies use less information. Further, our policies are robust and not prone to errors
in modelling demand. Finally, our work builds on prior research by Ball and Queyranne (2006)
who used competitive analysis of online algorithms to analyze the single-leg problem and assumed
no demand information is available. Our policies, which assume demand bounds, generalize theirs,
and we also provide alternative proofs for some of their results.
The rest of the paper is organized as follows: We provide a literature review in Section 2. Section
3 introduces our notation and describes our approach. In Section 4, we derive static nested booking
control policies when the objective is to maximize the competitive ratio. Section 5 extends this
analysis to the problem with an absolute regret criterion and Section 6 shows how the policies may
be dynamically updated. Section 7 presents an extensive set of computational results and Section
8 provides conclusions and suggestions for further research.
2. Literature Review
The booking (or capacity) control problem for a single resource has long been studied in the RM
literature. Littlewood (1972) was the rst to analyze the stochastic, single-leg problem with two
fare-classes and assumed product is sold in a low-before-high (LBH) manner; that is, demand in
lower fare class precedes demand in higher fare classes. Belobaba (1987,1989) discussed heuristic
extensions of Littlewoods rule to multiple fare classes, again assuming (i) LBH arrivals and (ii)
the probability distribution of demand in each fare class is known. Curry (1990), Wollmer (1992)
and Brumelle and McGill (1993) make similar assumptions on demand. Robinson (1995) relaxed
Y.Lan, H.Gao, M.Ball, I.Karaesmen: Revenue Management with Limited Demand Information
4 to appear in Management Science; manuscript no. XXX
the LBH assumption in his analysis but assumed requests for dierent fare classes arrive at non-
overlapping intervals. Lee and Hersh (1993) introduced a dynamic programming formulation for
the multiple fare class problem in which they relax the LBH assumption and assume the demand in
each fare-class is characterized by a stochastic process. Lautenbacher and Stidham (1999) address
the static (i.e., arrivals are LBH) and dynamic problems (i.e., arrival sequence is not ordered by
fare-class) for the multiple-fare case by analyzing the underlying discrete time Markov Decision
Process (MDP). More recently, Talluri and van Ryzin (2004b) analyzed the multiple-fare class
problem based on consumer choice. While this approach is more sophisticated and realistic than
many, it requires information not only on the arrival process but also on the choice behavior. There
are several other papers on the single-leg problem with various assumptions on demand or arrivals
(see Brumelle and Walczak, 2003, McGill and van Ryzin, 1999, and Talluri and van Ryzin, 2004a).
Until very recently, the adaptive method proposed by van Ryzin and McGill (2000) for the
single-leg, multi-fare problem was the only model in RM that relied on no demand information.
This approach updates booking limits iteratively based on past observations. van Ryzin and McGill
(2000) prove that the nested booking limits computed using their adaptive procedure converge
to the optimal. Huh and Rusmevichientong (2006) and Kunnumkal and Topaloglu (2007) suggest
dierent iterative approaches to compute the nested booking limits. All of these methods require
LBH arrivals, learn or adapt from ight to ight but not during the booking control horizon of
a particular ight, and may suer from poor performance during the transient period until the
booking limits converge to the optimal.
The objective in all the above papers is to maximize revenues given the risk-neutrality of the
decision-maker. Such assumptions have been questioned in the context of pricing in the RM lit-
erature (e.g., Feng and Xiao, 1999). In addition, there is a growing body of literature on pricing
(e.g., Farias and van Roy, 2006, Rusmevichientong et al., 2006, Lim and Shanthikumar, 2006) that
challenge the traditional assumptions on demand models, availability of demand information, and
also the risk-neutrality assumption.
Y.Lan, H.Gao, M.Ball, I.Karaesmen: Revenue Management with Limited Demand Information
to appear in Management Science; manuscript no. XXX 5
In this new stream of research, the work of Birbil et al. (2006), Eren and Maglaras (2006),
Perakis and Roels (2006), and Ball and Queyranne (2006) are the only ones - to the best of our
knowledge - that focus on capacity allocation (or booking control) in the single-leg RM problem.
Birbil et al. (2006) assume there are inaccuracies associated with discrete probability distributions
that characterize the demand in each fare class. They propose a robust framework where the
probability value associated with the total demand of each fare-class lies in a polyhedral set (as
opposed to the realized demand lying within a given interval as in our model and that of Perakis
and Roels, 2006). Eren and Maglaras (2006) propose using the maximum entropy approach to
update the booking limits while obtaining demand information. This approach makes use of past
observations and accordingly adds fractile constraints to a convex optimization problem that is
used to obtain an estimate of a discrete probability distribution. That estimate is then used to
determine the booking limits, and this forecasting/optimization cycle is repeated throughout the
booking horizon. Perakis and Roels (2006) derive a limited demand information model similar to
ours and provide a general approach to both the single-leg and the network RM problems. They
consider two objectives: maximizing the minimum revenues and minimizing the maximum regret.
They also restrict their analysis to particular policies (e.g., nested policies for single-leg, partitioned
allocations for network). In contrast, we provide a unied framework for both absolute regret and
competitive ratio criteria in the single-leg problem. Our analysis inspired by competitive analysis
of online algorithms is signicantly dierent than theirs. We provide closed-form optimal solutions
and prove optimality of the nested booking limits in our problem.
Ball and Queyranne (2006), which we refer to as BQ, were the rst to adapt the notion of com-
petitive analysis of online algorithms in the RM context. They derive static, nested booking limits
for the single leg problem and also consider bid-price controls where a booking request does not
belong to a particular fare class but comes with a proposed fare. Their policies require no infor-
mation on demand and come with performance guarantees (achieving maximum competitive ratio
as dened in the next section). They also show for two fare-classes how the booking limits can be
updated during the booking period to dynamically improve worst case performance. Our approach
Y.Lan, H.Gao, M.Ball, I.Karaesmen: Revenue Management with Limited Demand Information
6 to appear in Management Science; manuscript no. XXX
is more general than theirs in that we assume the availability of limited demand information and
show that the analysis extends to problems with both relative and absolute regret criteria. Our
optimal policies reduce to theirs in special cases, hence we obtain alternate proofs for some of their
results as well. Finally, our policies are practically more eective compared to BQ as we show in
our computational experiments.
3. Problem Denition
We consider the single-leg RM problem from the perspective of the competitive analysis of online
algorithms (see the survey in Albers, 2003). Using this approach, the performance of an online
algorithm is evaluated relative to the performance of an oine algorithm that considers the entire
input sequence simultaneously. An oine optimal solution is a solution obtained by an oine
algorithm (with hindsight) that optimizes the objective function of interest. In competitive analysis,
it is common to use the competitive ratio (CR) as a measure of an algorithms eectiveness. There
are two other performance metrics of interest: absolute regret, which is the dierence between the
objective function values of the oine and online algorithms, and relative regret, which is the ratio
of the absolute regret to the objective function value of the oine algorithm. Specically, we are
interested in having a guarantee on these measures under all possible demand scenarios (or input
sequences as we call them in our analysis).
CR is dened as the minimum of the ratio of revenues obtained by the online algorithm to the
oine revenues. If we let

be the set of all possible input sequences to an online algorithm


and, for any I

, let R(I; ) be the objective value achieved by the online algorithm for input I
and let R

(I) be the objective value achieved by an optimal oine algorithm. Then, CR is dened
as:
CR of = inf
I

R(I; )
R

(I)
.
Likewise, the maximum absolute regret (MAR) of the online algorithm is dened as
MAR of = sup
I

{R

(I) R(I; )}.


Y.Lan, H.Gao, M.Ball, I.Karaesmen: Revenue Management with Limited Demand Information
to appear in Management Science; manuscript no. XXX 7
By denition, CR is related to maximum relative regret (MRR): CR = 1 MRR. Clearly, the
algorithm that maximizes the CR also minimizes the MRR. We use CR and MAR in our analysis.
Note that these performance measures as dened above apply to deterministic algorithms, i.e.,
algorithms that apply the same decision rule and yield the same output for a given input sequence
as opposed to randomized algorithms that make some choices based on the draw of a random
number. While not as practical as deterministic ones, randomized algorithms are of special interest
from a technical standpoint; discussion on this topic is deferred until Section 4.4. For now, we are
interested in determining the best deterministic algorithm that maximizes the CR (or minimizes
the MAR). Based on the denition of robustness in Kouvelis and Yu (1997), maximizing the CR
(minimizing the MAR) leads to decisions that are relative-robust (deviation-robust).
Throughout this paper, let n denote the total capacity of the resource (seats, rooms, etc.) avail-
able and let m 2 denote the number of fare-classes. Let f
i
denote the fare for class i, where
f
1
> f
2
> > f
m
0. There are no restrictions on the demand or arrival process except that
requests arrive one-by-one and cancellations are not allowed. In our analysis, we assume each
request demands only one unit but this can be generalized as we discuss below. We are interested in
determining nested booking limits n b
1
b
2
b
m
0 that maximize the CR or minimize the
MAR. Note that nesting by revenue order remains the core of booking control in many traditional
RM implementations. Although Talluri and van Ryzin (2004b) show that these types of nested
policies may not be optimal in general, we show later in the text that they are optimal relative to
the CR and MAR criteria.
Nested policies can be implemented in two dierent ways: standard- and theft-nesting (see Talluri
and van Ryzin, 2004a). We only consider the standard implementation of the nested policies in
this paper: The booking limit b
i
denes the maximum number of booking requests to be accepted
in classes i to m. At any point in time, a request in class i is accepted as long as the number of
on-hand reservations in classes i to m is less than b
i
and remaining (available) capacity is positive.
We use an additional variable called bucket size, denoted by x
i
, in our analysis; we dene it as
x
m
= b
m
and x
i
= b
i
b
i+1
for i = 1, ..., m 1. The notation b and x refer to the vectors of the
Y.Lan, H.Gao, M.Ball, I.Karaesmen: Revenue Management with Limited Demand Information
8 to appear in Management Science; manuscript no. XXX
corresponding variables. Note that either of these vectors is sucient to characterize a nested
booking control policy. The protection levels that are commonly used in single-leg RM are easily
derived from the booking limits (see Talluri and van Ryzin, 2004a). The number of seats protected
for classes j =1, .., k from classes k +1 to m is equal to nb
k+1
, k =1, ..., m1. While our analysis
is carried out with b and x, we interpret some of our results with respect to protection levels, as
well.
We note that, in the remainder of the text, we use competitive analysis to evaluate the perfor-
mance of a policy, with policy referring to the decision rule and parameter values, as opposed to an
algorithm, which is a specic iterative procedure. In simple terms, competitive analysis is based on
worst-case analysis: one can think of an adversary in charge of generating booking requests. The
adversary is aware of the policy (nested booking limits in our case) and chooses an input sequence
(the number of requests and the arrival sequence) to create the worst possible policy performance
based on the criterion of interest, i.e. CR or MAR. Given a characterization of the input sequences
an adversary would choose, we determine the optimal parameters for the policy to maximize the
CR (alternatively, to minimize the MAR).
In its natural form, the single-leg RM problem has discrete demand. However, the analysis in
many research papers assumes continuity. In this paper, we distinguish between the continuous
problem and discrete problem. In the continuous problem, the demands, and therefore the booking
limits as well, may be any nonnegative real numbers. In this case, a request in a fare-class may be
partially accepted (split). Although the continuous problem is less realistic, its analysis is simpler.
The continuous case easily generalizes to multi-unit and multi-fare requests (as in batch arrivals) by
allowing splitting of requests. Our analysis carries through as long as each request demands a non-
negative and nite amount. Note that group bookings cannot be enforced/guaranteed because of
splitting. In the discrete problem, the demands are integral and the protection levels are restricted
to being integer. Our analysis of the discrete problem extends to multi-unit and multi-fare requests
as long as requests are split into integral quantities. In the rest of the paper, we assume, without
loss of generality, that input sequences consist of requests that demand one unit from a fare-class.
Y.Lan, H.Gao, M.Ball, I.Karaesmen: Revenue Management with Limited Demand Information
to appear in Management Science; manuscript no. XXX 9
4. Optimal Static Policies for the Competitive Ratio Problem
In this section, we analyze the multi-fare single-leg problem and derive optimal booking control
policies under the CR criterion assuming upper and lower bounds are available on demand in each
fare class. Consider an input sequence which consists of a nite stream of fare requests during the
booking horizon. For each fare class i, we assume the input sequences are restricted so that the
total number of units demanded in class i falls between L
i
and U
i
, where L
i
and U
i
are integers
with 0 L
i
U
i
for i = 1, ..., m. We use the notation L and U to denote the respective vectors
(L
1
, ..., L
m
) and (U
1
, ..., U
m
). Let (L, U) be the set of all input sequences where the total demand
in each fare-class falls between the upper and lower bounds, R

(I) be the oine revenue obtained


from sequence I, and R(I; b) be the online revenue gained by a standard nested booking limit
policy b when the policy is used to process the requests in sequence I. The problem of nding an
optimal booking control policy that maximizes the CR can be stated as follows:
z
CR
= max
b
z : z
R(I; b)
R

(I)
, I (L, U) (1)
where b is the vector of decision variables and z
CR
is the optimal CR. There are some potential
challenges in solving this maximization problem: 1) R(I; b) might not have a closed-form expression;
2) |(L, U)| grows exponentially with m, prohibiting any serious direct attempt with even small
problems. However, since there will be redundant constraints, which means the corresponding
sequences are redundant as well, a sequence reduction approach seems natural, and, as we will
show in the next two sections, this maximization problem can be rewritten in a very compact form.
The solution to the above problem will result in a static control policy.
4.1. Sequence Reduction
A sequence includes information on the amount of booking requests and their order of arrival.
Since each request in a sequence demands one unit, we can characterize the sequences based on
the fare-classes and units demanded: Let I[j] be the total number of class j requests in sequence I.
The prole of I, denoted by [I], is the m-dimensional vector, (I[j] : j =1, ..., m). Observe that the
oine optimal revenue realized in sequence I only depends on the prole, while the online revenue
Y.Lan, H.Gao, M.Ball, I.Karaesmen: Revenue Management with Limited Demand Information
10 to appear in Management Science; manuscript no. XXX
(of a policy) also depends on the arrival order of requests. However, given a prole, we can ignore
permutations of requests that do not yield the lowest online revenue (see Appendix A of the Online
Addendum for the proof).
Proposition 1 Relative to all input sequences with the same prole, a nested booking limit policy
b generates the least revenue when applied to the unique LBH sequence with that prole. This is
true for both the continuous and discrete problems.
From the standpoint of the maximization problem in (1), all non-LBH sequences can be discarded
based on Proposition 1. In the remaining sequences, there is a one-to-one relationship between
sequences and proles. This yields a substantial reduction in the size of the problem. Yet, the total
number of proles can be prohibitive. Therefore, we pursue further sequence reductions to dene a
tractable problem. We now introduce a categorization of input sequences, which is even a broader
concept than proles. The ultimate goal is to choose only one sequence in each category. For
mathematical completeness, we now introduce a virtual fare-class m+1 where b
m+1
=0, f
m+1
=0,
and L
m+1
, U
m+1
0 are arbitrary, non-negative numbers.
Denition 1 (Input Sequence Category) Given a nested booking limit policy b, an input sequence
category A
b
j
is the set of sequences such that an input sequence I belongs to category A
b
j
if and
only if j has the highest fare (hence the smallest index) among the classes whose booking limits are
reached after executing b on sequence I.
To better understand the notion of a category, consider the following: First of all, the virtual class
has b
m+1
=0, so at least the booking limit of class m+1 is always reached, and j is well dened.
By construction, A
b
m+1
includes all sequences for which no request is rejected when the booking
limit vector is b. Therefore,
R(I;b)
R

(I)
=1 for all I A
b
m+1
. Second, some categories may be empty. For
instance, in the trivial case of b
i
=n for all i =1, ..., m and

m
i=1
U
i
<n, no booking limit (except
for the virtual class) would be reached when policy b is applied to the sequences in (L, U). In
that case, all A
b
j
for j = 1, .., m would be empty, and the only category that would be non-empty
Y.Lan, H.Gao, M.Ball, I.Karaesmen: Revenue Management with Limited Demand Information
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is A
b
m+1
. In fact, A
b
m+1
= (L, U) in this case. Finally, the categorization is complete, meaning

m+1
j=1
A
b
j
=(L, U) for any policy b.
Appending more requests in classes k j to a sequence in category j will not change the online
revenue of policy b, since all such requests would be rejected. In addition, any permutation of the
order of requests in a sequence will not change its category, which means the category is totally
determined by the prole of the sequence. Note that the notion of a category applies to both
discrete and continuous problems, and so does our next result (see Online Addendum, Appendix
B for the proof).
Denition 2 (CAtegory-dominant-STream, or CAST) Given j = 1, ..., m, a LBH sequence I is
called a category-dominant-stream (CAST) if I has the prole of I[k] =U
k
for k j and I[k] =L
k
for k <j.
There are m CASTs in total. We denote each one by CAST
j
, j = 1, .., m. By denition,
CAST
j
[k] =U
k
for k j and CAST
j
[k] =L
k
for k <j.
Proposition 2 (Dominance of CAST) Consider a nested booking limit policy b and all input
sequences in some category A
b
j
. CAST
j
A
b
j
dominates the other sequences in category A
b
j
, i.e.,
R(I;b)
R

(I)

R(CAST
j
;b)
R

(CAST
j
)
for all I A
b
j
.
For any nested policy, Proposition 2 eectively reduces the number of sequences to be considered
down to m, disregarding the virtual class m+1 (which is not critical since
R(I;b)
R

(I)
= 1 for all I
A
b
m+1
). With these reductions, problem (1) can be reformulated as
z
CR
= max
b
z : z
R(CAST
k
; b)
R

(CAST
k
)
for k =1, ..., m. (2)
We next show how the optimal solution to the reduced formulation can be obtained by dening
an appropriate linear programming model. We rst focus on the continuous problem.
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12 to appear in Management Science; manuscript no. XXX
4.2. A Linear Programming Formulation for the Continuous Problem
In determining the optimal booking control policy, we use the bucket sizes x
i
, i = 1, ..., m, as the
decision variables. We make two observations regarding the optimal policy below.
First, if

m
i=1
U
i
n, then the optimal bucket sizes are x

i
=U
i
, i and z
CR
=1. Second, if there
is a class k such that (n

k
i=1
L
i
) <0, then any reasonable policy would have x
j
=0 for all j >k
and the problem size can be reduced by ignoring classes j >k in that case. This second observation
relies on the following: Remember that the lower bounds imply that all sequences have at least
L
i
requests of class i. Consider the quantity

k
i=1
L
i
; this represents the number of seats that are
guaranteed to be sold to classes 1 to k. Consequently, any reasonable policy would protect at least
that many seats for classes 1 to k. Hence, the remaining seats, i.e., (n

k
i=1
L
i
)
+
, are the total
number of seats that would be considered for sale for classes k + 1 to m. Therefore, the m-fare
problem is only interesting when

m
i=1
U
i
>n and

m1
j=1
L
j
<n. We impose these two conditions on
the problem parameters to keep our problem statement general, the notation simpler and solutions
to the problem non-trivial.
We study the properties of nested policies under CASTs so that we can rewrite the right hand
side of (2) in a form suitable for analysis. Note that any reasonable policy would have x
1
U
1
so
as not to protect any seats for class-1 that would denitely remain unsold. Likewise, x
i
U
i
for
all i =1, .., m; otherwise there would be a class k 1 whose bucket would have a slack (i.e., the
booking limit of class k would not be reached). Naturally, we require that

m
i=1
x
i
n so as not to
exceed the capacity.
By denition, the prole of each CAST is known. We further dene (k) = min{j :

j
i=1
CAST
k
[i] n, 1 j m} which denotes the index of the lowest-fare class to be accepted
in the oine optimal solution (requests of classes with lower fares are rejected) when the input is
CAST
k
. Then, we can express R

(CAST
k
), the oine optimal revenue for CAST
k
, as
R

(CAST
k
) =
_
n
(k)1

j=1
CAST
k
[j]
_
f
(k)
+
(k)1

j=1
CAST
k
[j]f
j
.
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to appear in Management Science; manuscript no. XXX 13
Next, we focus on the online revenue obtained from the CASTs. For any non-trivial m-fare
problem, the online revenue generated from CAST
k
can be considered in two parts: 1) from the
L
i
requests in classes i < k, with a subtotal revenue at most

k1
i=1
f
i
L
i
(because not all L
i
may
be accepted based on the bucket sizes), and 2) from the U
i
requests in classes i k, from which
revenue is

m
i=k
x
i
f
i
(note x
i
U
i
, from our discussion above). Then, R(CAST
k
; b), the online
revenue obtained by policy b and corresponding bucket sizes x, satises R(CAST
k
; b)

k1
i=1
f
i
L
i
+

m
i=k
f
i
x
i
. Therefore, we have an upper bound on the ratio of online revenues to that of oine,
and this upper bound is linear in the bucket sizes x
j
:
R(CAST
k
; b)
R

(CAST
k
)

k1
i=1
f
i
L
i
+

m
j=k
f
j
x
j
R

(CAST
k
)
.
Combining these observations, we can formulate a linear program (LP) that nds a continuous,
nested policy. We call this formulation the General Bounded Model (GBM):
GBM: z
CR
= max
x
z
s.t. R

(CAST
j
)z
j1

i=1
f
i
L
i
+
m

i=j
f
i
x
i
, j =1, ..., m (3)
m

i=1
x
i
n, (4)
0 x
j
U
j
, j =1, ..., m. (5)
Although GBM has been developed based on a necessary set of constraints and relations that
constitute an upper bound on the optimal CR, the solution to GBM provides the optimal nested
policy for the CR problem introduced in (1). We formalize this statement and discuss how a
closed-form solution to GBM can be derived in the next section.
Note that the actual CR problem expressed in (1) is not only reduced to a problem with a
small number of constraints based on CASTs, but its optimal policy in the continuous version
is obtained by solving a linear programming problem with 2m + 1 constraints. The multi-fare
continuous booking problem discussed in BQ can be represented using GBM. Theirs is a special
case: they use no information about the demand, hence L
i
=0 and U
i
= (or eectively U
i
n)
for i =1, ..., m in their problem.
Y.Lan, H.Gao, M.Ball, I.Karaesmen: Revenue Management with Limited Demand Information
14 to appear in Management Science; manuscript no. XXX
4.3. Optimal Policy for the Continuous Problem: Solution to GBM
Our analysis of GBM relies heavily on an investigation of the intrinsic structure of the LP and the
relationship among the parameters f
i
, U
i
, L
i
for i =1, ..., m, and n; details are provided in Appendix
C in the Online Addendum. An important step in the analysis is to determine the critical fare
class u {1, ..., m} such that classes j >u would be closed (i.e., booking limit of j >u would be
zero) in the optimal solution. Once u is known, the solution to GBM can be determined by solving
a set of linear equations made up of the binding constraints in the LP. We derive a closed-form
solution to the GBM based on these observations. The proof of the next result is also available in
the Online Addendum, Appendix C.
Proposition 3 (a) The optimal solution of GBM is
z
CR
=
R
+
u
/f
u
+N
u
R

(CAST
u
)/f
u
+

u1
i=1
g
i
(6)
x
CR
j
=
_
_
_
g
j
z
CR
+L
j
j <u
(R

(CAST
u
) z
CR
R
+
u
)/f
u
j =u
0 j >u
(7)
u = max{j m: R
+
j
j1

i=1
g
i
<N
j
R

(CAST
j
)} (8)
where the index u denotes the critical fare-class such that all classes k >u are closed, and g
i
, N
j
, R
+
j
are auxiliary parameters dened as
g
m
=
R

(CAST
m
)
f
m
, g
i
=
R

(CAST
i
) R

(CAST
i+1
)
f
i
, i =1, , m1, (9)
N
j
=n
j1

i=1
L
i
, R
+
j
=
j1

i=1
f
i
L
i
j =1, .., m. (10)
(b) The nested booking limits dened by
b
CR
j
=
m

i=j
x
CR
i
for j =1, , m (11)
maximize the CR in problem (1) and the optimal CR is z
CR
= z
CR
.
Note that our analysis so far yields the optimal solution within the class of nested policies. One
question that remains to be answered is whether nested policies are the best. The next result shows
that, in fact, this is true (see the Online Addendum, Appendix D for the proof).
Y.Lan, H.Gao, M.Ball, I.Karaesmen: Revenue Management with Limited Demand Information
to appear in Management Science; manuscript no. XXX 15
Theorem 1 For the continuous m-fare problem with demand bounds, the nested booking control
policy with booking limit vector b
CR
dened by (11) has a CR of z
CR
given by (6) and this is the
best possible among deterministic policies.
If all lower bounds are zero, the above result can be simplied, and the optimal booking limits
can be expressed in terms of n and g
j
for j = 1, ..., m. Although this is only a special case, we
provide a formal proof of the next result in Appendix E in the Online Addendum.
Corollary 1 For the continuous m-fare problem with all lower bounds equal to zero, the nested
booking control policy with booking limits dened by:
b
CR
i
=n

m
j=i
g
i

m
j=1
g
j
for i =2, ..., m
has a CR of n/(

m
j=1
g
j
) and this is the best possible among deterministic policies.
Note that for the special case of L
j
= 0, U
j
n for all j = 1, ..., m, we have R

(CAST
j
) =f
j
n,
and g
i
=n(1 f
i+1
/f
i
). This, in fact, denes the optimal nested policy obtained in BQ.
4.4. Randomized Policies
Our focus so far has been on deterministic policies. However, the performance can sometimes be
improved by allowing the use of randomization strategies. We dene a randomized policy by
starting with a given set of deterministic policies {
1
,
2
, ...}. The same input sequence may result
in dierent outputs when a randomized policy is used. This is because a deterministic policy is
randomly chosen from the given set, prior to observing and processing the input sequence. The
random choice prior to each execution is a random variable that is independent and identically
distributed with a known probability distribution. Let be a random variable dened over the
set {
1
,
2
, ...} given the probabilities P(=
j
). The expected objective function value of the
randomized policy is then E[R(I; )]. Consequently, the CR of a randomized policy is then
dened based on the expected performance:
CR of = inf
I

E[R(I; )]
R

(I)
.
Y.Lan, H.Gao, M.Ball, I.Karaesmen: Revenue Management with Limited Demand Information
16 to appear in Management Science; manuscript no. XXX
We recognize that randomized policies may not be very desirable in practice (confusing the
users and possibly the buyers). However, we believe our analysis is of theoretical interest and also
provides further insight into the performance obtained by rounding the continuous booking limits.
Given the class of randomized policies for the single-leg RM problem, we can show that no policy
can achieve a higher CR than z
CR
given in (6). While this may seem to be a trivial extension of
our previous results, analysis of randomized policies generally requires an approach dierent from
the analysis of deterministic policies. In fact, we use a dierent proof technique for the next result
(see Appendix F in the Online Addendum).
Theorem 2 For the continuous m-fare problem with demand bounds, no randomized booking con-
trol policy has a CR larger than z
CR
given in (6). Therefore, the deterministic nested booking limit
policy with booking limits dened by b
CR
in (11) is the best possible among all policies.
This result implies that nesting by revenue order provides the optimal policy for the single-leg
RM problem where the objective is to maximize the CR under limited demand information.
4.5. Solution to the Discrete Problem
In most practical settings, integral quantities of a product are sold indicating that a realistic analy-
sis should consider the discrete problem rather than the continuous one. On the other hand, we can
view the continuous problem as a (possibly very close) approximation for the discrete one in that,
rounding the booking limits up or down will have a relatively small impact on overall performance.
We note that with integer upper and lower bounds rounding always produces feasible booking
limits. To develop a randomized policy for the discrete problem, we rst consider the solution x
CR
of GBM given in equation (7). If this solution is non-integral, we create deterministic policies by
rounding up or down each x
CR
i
, i = 1, ..., m. Based on the rounding scheme, we dene probabili-
ties associated with each policy. We provide the details on how the policies and probabilities are
determined along with a proof of existence of a probability distribution in the Online Addendum,
Appendix G. Based on the analysis in Appendix G, we can show that the expected performance
Y.Lan, H.Gao, M.Ball, I.Karaesmen: Revenue Management with Limited Demand Information
to appear in Management Science; manuscript no. XXX 17
of the randomized policy is exactly the same as the performance of the best deterministic policy
for the continuous problem, which is our desired result:
Proposition 4 For the discrete m-fare problem with demand bounds, an appropriately dened
randomized policy achieves a CR of z
CR
, which is given in (6).
While this result shows that a (randomized) policy exists for solving the discrete problem, it (pos-
sibly more importantly) provides justication for creating discrete policies by selectively rounding
continuous policies.
5. Optimal Static Policies for the Absolute Regret Problem
The analysis in Section 4 easily extends to the problem with the absolute regret criterion where
the objective is to minimize the MAR. Let us rst express this problem in its general form:
z
AR
= min
b
z : z R

(I) R(I; b), I (L, U) (12)


where b is the vector of decision variables and z
AR
is the optimal MAR. We can reformulate this
problem by reducing the number of input sequences using Propositions 1 and 2. We only have to
consider the CASTs as inputs. The following LP (called GBM-AR) is designed to provide a lower
bound on the minimum MAR in the continuous problem:
GBMAR: z
AR
= min z
s.t. R

(CAST
j
) z
j1

i=1
f
i
L
i
+
m

i=j
f
i
x
i
, j =1, ..., m (13)
and (4), (5).
This model is actually easier to analyze than the GBM, and a closed-form solution is given below
(proof is omitted):
z
AR
= R

(CAST
u
) R
+
u
f
u
x
AR
u
(14)
x
AR
j
=
_
_
_
g
j
+L
j
j < u
N
u

u1
i=1
g
i
j = u
0 j > u
(15)
u = max{j m:
j1

i=1
g
i
<N
j
} (16)
Y.Lan, H.Gao, M.Ball, I.Karaesmen: Revenue Management with Limited Demand Information
18 to appear in Management Science; manuscript no. XXX
where u is the critical fare class such that classes k > u are closed, and the auxiliary parameters
g
i
, N
j
, R
+
j
for j =1, .., m are as dened in equations (9) and (10).
Following an argument similar to that for the CR problem, we can show that the optimal solution
of GBM-AR provides the optimal MAR of the problem in (12). Perakis and Roels (2006) derive
the same closed-form solution for the MAR problem using a dierent approach. In addition to
providing the optimal solution within the class of nested policies, our analysis in the previous
section can be used to prove that the optimal nested policy obtained by GBM-AR is the best
possible under the MAR criterion (details omitted). Hence, nesting leads to both deviation-robust
and absolute-robust decisions in the single-leg RM problem with limited demand information.
Theorem 3 For the continuous m-fare problem with demand bounds, the nested booking control
policy dened by the booking limits
b
AR
j
=
m

i=j
x
AR
i
for j =1, ..., m (17)
has minimum MAR of z
AR
(where x
AR
i
and z
AR
are given in (15) and (14)). No other policy,
deterministic or randomized, has a lower MAR.
A close look at the optimal policies for the CR and MAR problems, given in equations (6)-(8)
and (14)-(16), respectively, reveals that u u. Therefore, MAR policies tend to deny bookings to a
higher number of fare classes. Furthermore, x
CR
i
x
AR
i
for i < u u and

u
i=1
x
CR
i
=

u
i=1
x
AR
i
=n
at optimality. Our next result combines these observations:
Proposition 5 In the continuous problem with demand bounds, the optimal nested booking limits
obtained by (11) and (17) satisfy: b
AR
i
b
CR
i
for i =1, ..., m.
While competitive analysis using the CR or MAR criterion provides conservative solutions to
guarantee worst-case performance, the above result shows that the MAR criterion is more aggressive
in protecting seats, i.e., fewer seats are available for lower-fare classes and more seats are protected
for higher fares.
Y.Lan, H.Gao, M.Ball, I.Karaesmen: Revenue Management with Limited Demand Information
to appear in Management Science; manuscript no. XXX 19
Our analysis of the randomized policies and the discrete problem as presented in Sections 4.4
and 4.5, respectively, can be extended to the MAR problem. Details are omitted.
6. Dynamic Policies
In this section, we show how dynamically adjusting a static policy can improve the CR (or MAR)
in our problem. Our analysis extends the discussion in BQ (where a sample analysis for the CR
problem in the case of m=2 is provided) to multiple fare classes with demand bounds. Using the
imaginary adversary paradigm, the CR (or MAR) of a policy eectively assumes that the adversary
always adheres to an optimal strategy (i.e., the adversary chooses one of the CASTs as an input
sequence). On the other hand, if the adversary makes a mistake, we can consider a new problem
scenario based on the remaining capacity and requests accepted so far, and create a new policy for
the remaining requests in order to guarantee better overall performance.
Consider a dynamic scenario where a dynamic policy has been executing so that a partial input
sequence has already been processed. Suppose h
i
bookings have been accepted for fare class i for
i =1, ..., m by processing the partial sequence I
0
. This accumulates revenue of

m
i=1
h
i
f
i
from the

m
i=1
h
i
sold seats. The question is whether the booking limits can be adjusted to improve the CR
(MAR) achievable under a future input sequence

I, which yields the complete input sequence of
I =I
0

I. The concatenation of I
0
and

I into the complete input sequence I produces the following
prole: L
j
I[j] =I
0
[j] +

I[j] U
j
, j =1, ..., m. Since I
0
[j] h
j
, j =1, ..., m, it follows that I[j] h
j
must hold, so that we can update lower and upper bounds for

I as follows:

L
j
=max(L
j
, h
j
) h
j
,

U
j
=U
j
h
j
, j =1, ..., m.
Let n =n

m
i=1
h
i
denote the remaining number of available seats,

b the nested booking limits
for allocating the remaining n seats, and x the corresponding bucket sizes.
Given a partial policy

b and partial input sequences I
0
,

I, the overall CR can be improved by
solving
z
CR
= max

b
z : z

m
i=1
h
i
f
i
+R(

I;

b)
R

(I
0

I)
,

I (

L,

U). (18)
Y.Lan, H.Gao, M.Ball, I.Karaesmen: Revenue Management with Limited Demand Information
20 to appear in Management Science; manuscript no. XXX
where z
CR
is the new guarantee on the worst-case CR performance. Similarly, the improved mini-
mum MAR of z
AR
is determined by:
z
AR
= min

b
z : R

(I
0

I) z
m

i=1
h
i
f
i
+R(

I;

b),

I (

L,

U). (19)
Applying Propositions 1 and 2 to the partial

I sequences, we only have to focus on m sequences
that dominate the others in (

L,

U). These sequences have the same structure as CASTs. Following
the corresponding steps in Sections 4.2 and 5, the optimal CR (MAR) can be computed by solving
a LP. This LP has the same structure as GBM (GMB-AR). Closed-form solutions are obtained by
replacing appropriate parameters in (6)-(8) and (14)-(16). The closed-form solutions and discussion
of special cases are provided in Appendix H in the Online Addendum.
These dynamic policies are easy to implement; specically, the h
j
should be updated each time
a request is accepted, LPs are re-solved and the booking limits adjusted accordingly. These tasks
require minimal computational resources as we have closed-form optimal solutions of the LPs. The
idea of such dynamic adjustments is reminiscent of re-optimization in traditional RM where a
static model is used in a rolling horizon fashion to mimic the performance of a dynamic program.
The major dierence in our dynamic approach is that we consider the remaining capacity and the
past performance (as represented by the revenue component

m
i=1
h
i
f
i
) from a partial input to
guarantee a better worst-case performance for the entire booking horizon.
7. Computational Results
While the policies obtained above come with performance guarantees, such worst-case guarantees
provide only a limited indication of their eectiveness in practical situations. We have designed
computational experiments (i) to quantify the performance of policies obtained using the CR and
MAR criteria, (ii) to illustrate the dierences between static and dynamic policies, (iii) to compare
our policies to other well-known procedures in single-leg RM, and (iv) to show the robustness of
our policies under various demand scenarios and parameter settings.
Y.Lan, H.Gao, M.Ball, I.Karaesmen: Revenue Management with Limited Demand Information
to appear in Management Science; manuscript no. XXX 21
7.1. Performance of Our Policies: CR vs. MAR, Static vs. Dynamic
In this section, our goal is to test the eectiveness of CR vs. MAR and static vs. dynamic poli-
cies. The policies that use demand bounds are denoted BSTAT-CR, BSTAT-AR, BDYN-CR and
BDYN-AR, and are obtained by solving GBM, GBM-AR, dynamically adjusted GBM and dynami-
cally adjusted GBM-AR, respectively. The policies STAT-CR, STAT-AR, DYN-CR, and DYN-AR,
respectively, are special cases of these policies where no demand information is used. We only
implement the deterministic versions of our policies, and use continuous booking limits in these
experiments. We use simulation to study the (experimental) performance of the policies. We also
use FCFS and OFFLINE policies as benchmarks; FCFS accepts all arrivals up to the capacity and
OFFLINE computes the hindsight optimal solution and revenue at the end of each simulation run.
The demand is uniformly distributed, m = 2, and n = 100 in all the examples in this section.
We vary the fare values, demand parameters, arrival regimes with respect to fare classes (LBH vs.
time-homogeneous arrivals), and the demand mix (mean demand of a fare class relative to the mean
demand of other classes) in our experiments. Requests arrive one-by-one in all the experiments.
When arrivals are LBH, the sequence of arrivals is known, and the total number of arrivals in each
class is computed by sampling from the demand distribution in each simulation run. When the
arrivals are time-homogeneous, the total number of arrivals in each class is determined by sampling
from the corresponding (aggregate) demand distribution. Then, the arrival times of requests within
each class are randomly generated from a Uniform(0,1) distribution. The corresponding arrival
times determine the sequence of arrivals in the time-homogeneous case.
Example-1a. The fares are (f
1
, f
2
) =(500, 100), and demand in each fare class is discrete uniform
distributed between L
i
=40 and U
i
=80, i =1, 2. We use 6000 simulation runs with LBH arrivals in
this example. The booking limit of class-2 for each of the policies, the theoretical CR of each policy
computed given the demand bounds, average policy revenues, relative performance (computed by
taking the ratio of policy revenues to OFFLINE in each simulation run, and averaging this ratio
across all simulation runs) of policies, and the average number of seats sold are displayed in Table
1. The static and dynamic policies are equivalent in this example because of LBH arrivals (see
Y.Lan, H.Gao, M.Ball, I.Karaesmen: Revenue Management with Limited Demand Information
22 to appear in Management Science; manuscript no. XXX
the discussion in Appendix H in the Online Addendum). Note that the dierences between the
booking limits of CR and MAR policies are signicant when no demand information is used. As
expected, the worst-case CR is not an indication of the average performance of the policies. In this
example, STAT-CR achieves signicantly lower average revenues compared to other policies based
on these booking limits and fares: note that STAT-CR achieves a higher load (as indicated by the
average number of seats sold) compared to the other policies, but the other policies accept more
class-1 requests leading to higher average revenues.
We analyzed the performance of the policies more closely by studying the distribution of revenues
(i.e., we computed estimates of percentiles). We split the 6000 simulation runs into 30 samples of
size 200 each, computed the percentiles in each sample, and took the averages of the percentiles of
the samples to obtain a good estimate. This information is provided in Figure 1. Notice that the
ranking of the policies with respect to the 10
th
, 50
th
and 90
th
percentiles are dierent. In fact, the
ranking of our policies in the 10
th
percentile is reversed in the 90
th
. Hence, no policy (OFFLINE
and FCFS excluded) stochastically dominates the others. Note that our use of the term stochastic
dominance is only based on numerical observations; we do not provide a theoretical foundation
here. STAT-CR has the highest 10
th
percentile value. The use of demand information degrades
the performance of CR policies exhibited in the results for the 10
th
percentile. However, demand
information provides signicant gains for the 90
th
percentile results: the likelihood that BSTAT-
CR achieves a revenue of at least $150,000 is about 10% whereas STAT-CR can only guarantee
that the revenues will be at least $124,000 10% of the time. The opposite relationship is observed
between STAT-AR and BSTAT-AR; STAT-AR has a higher (lower) 90
th
(10
th
) percentile values
compared to BSTAT-AR. Table 1 indicates that these dierences are related dierences in the
booking limits and dierences in aggressiveness/conservatism (in terms of the number of seats
protected for class-1).
This example shows the main dierence between CR and MAR policies and also the eect of
demand information. The MAR policies set a lower booking limit for class-2 and protect more seats
for class-1. Therefore, the 90
th
(10
th
) percentile values of their revenue distributions are higher
Y.Lan, H.Gao, M.Ball, I.Karaesmen: Revenue Management with Limited Demand Information
to appear in Management Science; manuscript no. XXX 23
Booking Limit Theoretical Average of ratio Average
of class-2 CR Average of policy revenues number of
Policy b
2
(%) revenues to OFFLINE (%) seats sold
BSTAT-CR, BDYN-CR 31.51 89.04 129,235 95.37 89.3
BSTAT-AR, BDYN-AR 28 87.69 129,501 95.28 86.93
STAT-CR, DYN-CR 55.5 66.19 114,302 85.84 98.79
STAT-AR, DYN-AR 20 84.61 128,013 93.82 79.58
FCFS 100 42.86 101,864 76.63 98.99
OFFLINE 100 135,663 100 98.99
Table 1 The booking limit, theoretical CR, and average performance of policies in Example-1a.
94000
104000
114000
124000
134000
144000
154000
164000
10 30 50 70 90
percentile
p
o
l
i
c
y

r
e
v
e
n
u
e
OFFLINE BDYN-CR, BSTAT-CR DYN-CR, STAT-CR
BDYN-AR, BSTAT-AR DYN-AR, STAT-AR FCFS
Figure 1 Distribution of revenues for each policy in Example-1a
(lower) than the CR policies. The use of demand information increases the average revenues of
both the CR and MAR policies and decreases the dierences between the performances of CR and
MAR. We repeated Example-1a with dierent demand parameters and arrival regimes. The results
are reported in the Online Addendum (see Example-1b through Example-1f in Appendix I).
Example-2a. We next investigate the eect of the fare ratio r =f
2
/f
1
. The demand has the same
distribution as in Example-1a. We vary the fare ratio from 0.1 to 1. The arrivals are LBH. Figure 2
shows how the average of the ratios of policy revenue to OFFLINE revenue changes with r. Notice
that in this case the CR and MAR policies result in similar average performance when demand
information is used. Use of demand information not only improves the average performance but it
Y.Lan, H.Gao, M.Ball, I.Karaesmen: Revenue Management with Limited Demand Information
24 to appear in Management Science; manuscript no. XXX
0.85
0.875
0.9
0.925
0.95
0.975
1
0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1
ratio of fares (r)
a
v
g
.

o
f

r
a
t
i
o

o
f

p
o
l
i
c
y

r
e
v
e
n
u
e
s

t
o

O
F
F
L
I
N
E

r
e
v
e
n
u
e
s
DYN-CR, STAT-CR DYN-AR, STAT-AR
BDYN-AR, BSTAT-AR BDYN-CR, BSTAT-CR
FCFS
Figure 2 Performance of each policy relative to OFFLINE in Example-2a
also makes the performance of policies less sensitive to changes in the fare ratio r. MAR policies
perform better than CR policies when there is no demand information and r is low: STAT-AR is
signicantly better than STAT-CR for r = 0.1; this is expected because STAT-AR accepts more
class-1 requests than STAT-CR. We repeated this experiment with a dierent demand mix (see
Example-2b in Appendix I of the Online Addendum). In that experiment the mean demand of
class-2 is twice the mean demand of class-1: the relative performance of the policies with demand
bounds are unaected, however, STAT-CR and STAT-AR perform dierently, with the former
having higher revenues than the latter for low values of r.
Next, we look at the eect of the quality of demand information on our policies.
Example-3. The arrivals are LBH and the true demand in each fare class is uniformly distributed
between 40 and 80 as in Example-1a. In addition to the true range of the demand, we use our policies
with a narrow range of demand where the upper and lower bounds of demand are estimated to be
55 and 65, also with a wide range where the upper and lower bounds of demand are estimated to
be 20 and 100. This setup results in three versions of each of our policies, and we denote them as T
(for true bounds), N (for narrow range) and W (for wide range). The average relative performance
of the policies are reported for dierent fare ratios in Figure 3. Note that the results with true
Y.Lan, H.Gao, M.Ball, I.Karaesmen: Revenue Management with Limited Demand Information
to appear in Management Science; manuscript no. XXX 25
0.92
0.93
0.94
0.95
0.96
0.97
0.98
0.99
1
0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1
fare ratio (r)
a
v
g
.

o
f

r
a
t
i
o

o
f

p
o
l
i
c
y

r
e
v
e
n
u
e

t
o

O
F
F
L
I
N
E

r
e
v
e
n
u
e
BDYN-CR-T, BSTAT-CR-T, BDYN-AR-T,BSTAT-AR-T
BDYN-AR-N, BSTAT-AR-N
BDYN-CR-N, BSTAT-CR-N
BDYN-CR-W, BSTAT-CR-W
BDYN-AR-W, BSTAT-AR-W
Figure 3 The relative performance of the policies with inaccurate demand information in Example-3
bounds are no dierent than the results in Example-2a, and the MAR and CR policies have almost
exactly the same relative performance regardless of the fare ratio. This is still true when the range is
narrow. However, the eect of wide range on MAR and CR policies diers. When the range is wide
and the fare ratio is low, MAR policies have poor performance because they expect higher class-1
demand and (aggressively) set lower booking limits. At higher fare ratios, this eect is minimal
and the performance of the two policies is similar. To more easily understand the dierences in
these policies, we display the various booking limits at three dierent fare ratios in Table 2. One
interesting observation in this example is the following: The policies do not perform perfectly when
r = 1 if a narrow range is used. This is very surprising given the fact that all requests have the
same fare, and any reasonable policy (including FCFS) would perform as well as OFFLINE when
r =1. The main reason for this is that both the MAR and CR policies allow for no more than 45
class-2 requests when the range is narrow, because the estimated lower bound on class-1 demand is
55 (see the optimal bucket sizes in equation (7) of Section 4.3). Hence they reject too many class-2
requests.
We repeated this example with a dierent demand mix (mean demand of classes 1 and 2 were
40 and 80). The main observations remained the same. Narrow bounds make the MAR and CR
Y.Lan, H.Gao, M.Ball, I.Karaesmen: Revenue Management with Limited Demand Information
26 to appear in Management Science; manuscript no. XXX
BSTAT-CR-T, BSTAT-CR-N, BSTAT-CR-W, BSTAT-AR-T, BSTAT-AR-N, BSTAT-AR-W,
r BDYN-CR-T BDYN-CR-N BDYN-CR-W BDYN-AR-T BDYN-AR-N BDYN-AR-W
0.2 31.5 37.19 32.78 28 37 16
0.5 42.5 40.15 50 40 40 40
0.9 56.15 44.01 72.58 56 44 72
Table 2 The booking limit of class-2 for each policy in Example-3
policies almost indistinguishable, wide bounds aect the performance of the MAR policy when the
fare ratio is low, and narrow bounds lead to clearly suboptimal choices when the fare ratio is high.
Nonetheless, our policies remain very robust: they achieve at least 92% of the OFFLINE revenues
on the average in all the experiments. Note that this experiment only studies the eect of demand
information when the demand distribution has the correct mean, but has a range that is either too
narrow or too wide. The performance of our policies can be very poor if the range of demand is
chosen arbitrarily, e.g., when there is no overlap between the estimated range and the true range.
However, such instances are not very realistic and/or are problematic for any method that relies
on demand information.
The observations from this set of experiments can be summarized as follows: (1) CR and static
policies are better in terms of the 10
th
percentile of the revenue distribution, except when class-2
demand is low: these policies are more conservative protecting too few high fare seats. (2) MAR
and dynamic policies are better in terms of the 90
th
percentile of revenues, i.e. the chance of
achieving higher revenues is higher with these policies, except when class-1 demand is low. (3)
Time-homogeneous arrivals are in general better for all the policies, but can hurt the performance
of dynamic MAR policies when class-1 demand is low. (4) The use of correct demand information
decreases the variance in revenues of MAR and CR policies, increases the average performance,
and makes the relative performance of these policies less sensitive to changes in the fare ratio. (5)
The dierence between MAR and CR policies is negligible when correct demand information is
used and class-1 demand is low.
7.2. Comparison to other well-known policies
In this section, we compare our policies to other well-known methods. We use (i) Littlewoods rule
(we call it EMSR as in Belobaba, 1989) for m = 2, (ii) EMSR-b heuristic for m > 2 (see Talluri
Y.Lan, H.Gao, M.Ball, I.Karaesmen: Revenue Management with Limited Demand Information
to appear in Management Science; manuscript no. XXX 27
and van Ryzin, 2004a), (iii) the dynamic programming (DP) model of Brumelle and McGill (1993)
when m>2 and arrivals are LBH, and (iv) the Markov Decision Process (MDP) model of Lee and
Hersh (1993) for Markovian arrivals. These policies are benchmarks for our methods and represent
the ideal situations where one has complete information about arrival processes or probability
distribution of demand. From a practical point of view, these methods serve another purpose: these
are methods that are popular in practice and research. However, their performance with forecast
errors is not widely reported. We also perform sensitivity analysis on these methods and compare
them to our methods under scenarios where either the assumptions in these models are violated or
there is an error in model parameters. In this section, we only report the performance of the policies
relative to OFFLINE. Each instance in each experiment involves 300 simulation runs. The capacity
is n =100 unless noted otherwise. The demand parameters for our policies are computed by setting
the lower and upper bounds on demand to two standard deviations away from the (estimated)
mean of each fare class. This is a simple, heuristic rule that does not necessarily provide true
bounds on demand. In some cases, this choice of bounds may be a relatively poor characterization
of the range of demand, e.g., when asymmetric demand distributions are involved. As will become
evident from our results, our policies perform well, even when poor estimates of demand bounds are
used to compute the policy parameters. Our policies that use no demand information are excluded
from the discussion in this section unless noted otherwise, because the focus is on the methods
that use some form of demand information.
Example-4. In this example, the fares are (f
1
, f
2
) =(500, 100). The demand for each fare class
is independent and follows a Poisson distribution. We denote the mean demand of class i as
i
,
i =1, 2. The demand factor (ratio of total mean demand to capacity) is 1.2 while the mean demand
of the fare classes [
2
,
1
] ranges from [120,0] to [0,120]. When arrivals are time-homogeneous (see
Figure 4), MDP is the optimal policy and it performs remarkably well compared to OFFLINE. Note
that CR policies perform comparably to EMSR except in the extreme case where class-2 demand
is negligible and class-1 demand exceeds capacity (which is not realistic from a RM perspective,
and/or not interesting from a segmentation and capacity control point of view). There is less than
Y.Lan, H.Gao, M.Ball, I.Karaesmen: Revenue Management with Limited Demand Information
28 to appear in Management Science; manuscript no. XXX
95%
96%
97%
98%
99%
100%
[120,0] [100,20] [80,40] [60,60] [40,80] [20,100] [0,120]
mean demand [
2
,
1
]
a
v
g
.

o
f

r
a
t
i
o

o
f

p
o
l
i
c
y

r
e
v
e
n
u
e

t
o

O
F
F
L
I
N
E

r
e
v
e
n
u
e

BDYN-CR BSTAT-CR BDYN-AR
BSTAT-AR EMSR MDP
Figure 4 Average relative performance of policies in Example-4
1% dierence in the relative performance of any of our policies. We repeated this example with
LBH arrivals. The arrival regime does not aect the relative performance of the policies, and their
performance relative to EMSR does not change (EMSR is optimal when arrivals are LBH). The
results with LBH arrivals and the performance of policies that do not use demand information are
presented in Example-4 in Appendix I of the Online Addendum.
We utilized the same example, keeping the mean demand at [60,60] but varying the fare ratio.
The main observations remain the same: MDP (as the ideal solution) is close to OFFLINE when
arrivals are time-homogeneous. Our policies are as good as EMSR at all fare ratios regardless of
the arrival regime (except when class-2 demand is negligible). The relative performance of our
policies is no worse than 95% in any of the experiments. In these experiments, the additional
benet of using the dynamic versions of our policies is not signicant. This is because the demand
is stationary and demand mix is balanced. Next, we look at an example with more than two fare
classes.
Example-5. This is adapted from the example used in Talluri and van Ryzin (2004a), Sec-
tion 2.2.3.4. We have m= 4, fares are f = (1050, 567, 527, 350), n = 124, the demand is Normally
distributed and independent across fare classes. The arrivals are LBH and mean demand is 17.3,
Y.Lan, H.Gao, M.Ball, I.Karaesmen: Revenue Management with Limited Demand Information
to appear in Management Science; manuscript no. XXX 29
DP EMSR-B BDYN-CR BSTAT-CR BDYN-AR BSTAT-AR FCFS
0.94 0.91 0.92 0.93 0.94 0.94 0.87
Table 3 Average of ratio of policy revenue to OFFLINE revenue in Example-5 when CoV=0.4.
45.1, 73.6 and 19.8 for classes 1 through 4, respectively. The demand for all fare classes has the
same coecient of variation (CoV) and we set CoV=0.4. Note that static and dynamic policies
are not equivalent in this example. The average relative performance is reported in Table 3. The
optimal policy in this case is given by DP. BSTAT-AR and BDYN-AR are almost as good as DP
in this example. All of our policies dominate EMSR-b. The performance of our policies with no
demand information is given in Example-5 in Appendix I of the Online Addendum. Appendix I
also provides the results of further experiments obtained by increasing the CoV of the distribution
(and using truncation in the simulations): the relative performance of the various policies remains
the same as CoV increases, while the deviation from the best policies from DP becomes slightly
larger.
The results of the last two experiments are very encouraging: our methods with limited demand
information are practically as good as EMSR and even better than EMSR-b which is commonly
used in airline RM practice. Note that the main motivation for our work on robust methods is lack
of data and accurate forecasts. In real life, not only will the demand forecasts be wrong, but also
some of the assumptions in models such as EMSR, DP or MDP may fail to hold. The next set of
experiments shows how these methods perform when booking limits of the policies are computed
with incorrect demand models and/or data.
Example-6. In this example, m = 2, demand is Poisson distributed, arrivals are time-
homogeneous, and parameters of all control policies are computed assuming a demand mix of
[40,40] for the booking horizon. However, there is an unexpected surge and the demand doubles in
the second half of the booking horizon, bringing the demand mix to [60,60]. The average relative
performance of the policies as a function of the fare ratio r is given in Figure 5. EMSR performs
signicantly worse when r is small because the optimal protection level chosen by Littlewoods rule
decreases with r, and EMSR is not able to benet from the unexpected surge in the demand of
Y.Lan, H.Gao, M.Ball, I.Karaesmen: Revenue Management with Limited Demand Information
30 to appear in Management Science; manuscript no. XXX
86%
88%
90%
92%
94%
96%
98%
100%
0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1
fare ratio (r=f
2
/f
1
)
a
v
e
r
a
g
e

o
f

r
a
t
i
o

o
f

p
o
l
i
c
y

r
e
v
e
n
u
e

t
o

O
F
F
L
I
N
E

r
e
v
e
n
u
e



BDYN-CR BSTAT-CR BDYN-AR BSTAT-AR
FCFS MDP EMSR
Figure 5 Average relative performance of policies in Example-6
class-1. There is not a signicant dierence among our policies; they all dominate EMSR and are
dominated by MDP which is able to adjust booking limits based on remaining time and capac-
ity. Note that the policies that protect the highest number of seats for class-1 (e.g., STAT-AR,
DYN-AR) and can dynamically update the booking limits (e.g., DYN-AR) perform well in this
experiment. See Example-6 in Appendix I of the Online Addendum for the performance of our
policies with no demand information.
We also looked at what happens when the parameters of the demand distribution are misspec-
ied. See Example-7 in Appendix I of the Online Addendum. In that example, we have m = 2,
the true demand distribution of class-2 is known, whereas only an estimate of the parameter of
the demand distribution of class-1 is available. All policy parameters are determined based on this
estimate. The sensitivity of our results is no more or less than that of EMSR to forecast errors in
that two-fare example. Our experiments conrm that our policies with limited demand information
perform as well as EMSR under various scenarios. We see that MDP is quite robust to the error
in parameter estimation in Example 7 where the arrivals are stationary and only the mean arrival
rate for the MDP model is misspecied. In another experiment (see Example-8 in Appendix I of
the Online Addendum), we test whether MDP is aected by stationarity vs. non-stationarity of the
Y.Lan, H.Gao, M.Ball, I.Karaesmen: Revenue Management with Limited Demand Information
to appear in Management Science; manuscript no. XXX 31
arrivals. In fact, MDP performs very poorly if it assumes the arrival rate is time-invariant whereas
the actual arrival rate is time-dependent. In contrast, our policies are only sensitive to aggregate
demand information, and do not require a complete characterization of the arrival process.
8. Conclusions
In this paper, we have analyzed the traditional single-leg RM problem from the perspective of
competitive analysis of online algorithms. Our models make use of limited demand information
and we derive static and dynamic policies for both competitive ratio and absolute regret criteria.
Our optimal booking control policies have signicant practical advantages: the nesting property
of booking limits is preserved while the need for information is reduced, and the optimal policy
parameters are obtained in closed-form, hence the computational burden is minimal. Our compu-
tational experiments show that, when coupled with good estimates of the bounds on demand, our
policies have average performance that is similar to EMSR and EMSR-b, which are two widely
used methods. At the same time, our policies also perform well when subjected to errors in demand
information and/or deviations from standard assumptions used in traditional RM models.
From a research perspective, the competitive analysis of online algorithms approach is very
promising in RM. In this paper, we took a rst step in using limited demand information to increase
the practical eectiveness of online algorithms in RM. Adding more demand information to the
single-leg problem (e.g., the use of time-varying bounds) and applying the competitive analysis
ideas to the network RM problem remain as challenging future research topics. In this paper,
analysis was carried out assuming the demand information is given and static. However, it is worth
investigating how demand bounds can be estimated, what types of estimation procedures and/or
choice of demand bounds make our policies most eective, and how robust methods can be adapted
to changes in demand information.
Acknowledgments
The rst three authors acknowledge the support of the National Science Foundation (NSF) under grants:
DMI0205489 and DMI0540312. We thank the Associate Editor, two anonymous referees, and the Department
Editor, Candace Yano, for their comments that signicantly improved the exposition of the text.
Y.Lan, H.Gao, M.Ball, I.Karaesmen: Revenue Management with Limited Demand Information
32 to appear in Management Science; manuscript no. XXX
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Y.Lan, H.Gao, M.Ball, I.Karaesmen: Revenue Management with Limited Demand Information
to appear in Management Science; manuscript no. XXX 1
Online Addendum to
Revenue Management with Limited Demand Information
Yingjie Lan Huina Gao Michael Ball* Itir Karaesmen
Robert H. Smith School of Business, University of Maryland
College Park, MD 20742 USA
{ylan, hgao, mball, ikaraes}@rhsmith.umd.edu
*Corresponding author
Appendix A: Proposition 1
Proposition 1 Relative to all input sequences with the same prole, a nested booking limit policy b gener-
ates the least revenue when applied to the unique LBH sequence with that prole. This is true for both the
continuous and discrete problems.
Proof We prove this rst for the case of a discrete (integer) booking limit policy b. The main idea behind
the proof is that, starting with any initial input sequence I that is not LBH, we can iteratively swap the
order of requests in this sequence (eventually to reach a LBH sequence) such that the iterations/swaps will
never lead to online revenue gains for the nested policy b.
Let I(k) {1, ..., m} to be the fare class of the k
th
request in sequence I. If an input sequence, I, is
not LBH, then we can nd some index k such that I(k) < I(k +1); we construct a new sequence I

such
that I

(j) = I(j) for j k 1 and j k + 2, I

(k) = I(k + 1), and I

(k + 1) = I(k). We start with the


following observation regarding (standard) nested policies: If any two consecutive requests are both accepted
or rejected by a nested policy b, then a swap in their arrival order will not aect the decision on any request
in the entire sequence. For policy b, if I(k) and I(k +1) were both rejected/accepted in I, then the same
would happen in I

, and the same online revenue is generated.


Since the application of a static policy does not allow re-opening of closed fare classes, it is impossible
that I(k) is rejected and I(k +1) is accepted in I under (standard) nested policy b. So the only remaining
case is when I(k) is accepted and I(k +1) is rejected in I. There are two possibilities for I

: The rst one is


to reject I

(k) =I(k +1) then accept I

(k +1) =I(k), which is obviously identical to the decisions made for


I, and so we will have the same online revenue for both I and I

. The other one is to accept I

(k) and reject


I

(k +1). We show below that policy b would generate less revenue executing sequence I

in this case.
Y.Lan, H.Gao, M.Ball, I.Karaesmen: Revenue Management with Limited Demand Information
2 to appear in Management Science; manuscript no. XXX
We keep track of the number of accepted reservations while processing an input: We denote the length
of a sequence (i.e., the total number of requests in a sequence) by |I|. By denition, |I| =

m
i=1
I[i]. Let
B
j
(t), t =0, 1, , |I| be the total number of accepted reservations of classes j to m by policy b after the t
th
request of sequence I has been processed, and B

j
(t) be the analagous quantity for the sequence I

. We refer
to B
j
(t) and B

j
(t) as the booking record of class j under sequences I and I

, respectively. Let us study how


a nested booking limit policy b works. If a request of fare class j is accepted, it increases the booking record
of each of the classes 1 to j. A request of class j is rejected if the booking record is already equal to the
booking limit for class j. Notice that the rst k 1 requests of sequences I and I

are identical and we have


B
j
(k 1) =B

j
(k 1), j =1, ..., m.
The case we are investigating is the one where both I(k) and I

(k) are accepted, which gives B


j
(k) =
B
j
(k 1) +1 for j I(k) and B

j
(k) =B

j
(k 1) +1 for j I

(k). As I(k) <I

(k) =I(k +1) and B


j
(k 1) =
B

j
(k 1), we have B
j
(k) = B

j
(k) for j I(k). Notice that the next request I

(k + 1) = I(k) is rejected,
which means for some i I(k), the booking limit has been reached: B

i
(k) =b
i
. As i I(k), we must have
B
i
(k) =B

i
(k) =b
i
. Thus only requests with fares strictly higher than f
i
may be accepted in the future for
both sequences, and so only the identical booking records B
j
(k) = B

j
(k) for j i matter in the future.
As I(k +1) =I

(k +1) are both rejected, resulting in no change in the booking records, we know that all
the future decisions would be the same for both I and I

. So, the only dierence in decisions occurs while


processing requests I(k) and I(k +1), and a lower online revenue is generated from sequence I

.
We conclude from the analysis above that a swap of two consecutive fare requests into LBH order will
never lead to a gain in revenue. From any input I, after nite number of swaps, we will eventually end reach
a LBH sequence. Since each swap gains no revenue, that means no other input sequences can have lower
revenue than the LBH input, which is the desired result for the discrete case. For a continuous b, the same
logic applies. The only technical detail that diers involves the swap operation. The swap must be applied
to consecutive requests of arbitrary sizes; the details of this generalization are omitted.

Appendix B: Proof of Proposition 2


Proposition 2 (Dominance of CAST) Consider a nested booking limit policy b and all input sequences in
some category A
b
j
. CAST
j
A
b
j
dominates the other sequences in category A
b
j
, i.e.,
R(I;b)
R

(I)

R(CAST
j
;b)
R

(CAST
j
)
for all
I A
b
j
.
Y.Lan, H.Gao, M.Ball, I.Karaesmen: Revenue Management with Limited Demand Information
to appear in Management Science; manuscript no. XXX 3
Proof The framework we use here is similar to the one in the proof of Proposition 1. We show that
from any given sequence I in the desired category A
b
j
, a nite series of input sequences can be constructed,
with non-increasing values of the ratio of the online to oine revenues, leading to a sequence satisfying the
proposition. We present the proof for the discrete case; the proof for the continuous case is similar and is
omitted.
Remember that CASTs have the following properties by denition: they are LBH sequences with a particu-
lar prole. In this proof, we focus on LBH sequences and describe the impact of certain iterative adjustments
to those sequences. This is without loss of generality since any sequence that is not LBH can be transformed
into a new sequence that is LBH using the techniques from the proof of Proposition 1 in Appendix A. The
transformation does not change the prole of the sequence (hence oine revenues are unaected) and the
resulting sequence has online revenues that are no more than the revenues of the original sequence (see
Proposition 1 above).
Consider a LBH sequence I A
b
j
whose prole does not match that of a CAST. First we will make
adjustments to I to ensure I[k] =U
k
for all k j. Suppose there is a k j such that I[k] <U
k
. Consider the
new sequence I

where a class k request is appended to the end of I. The sequence I

belongs to the same


category as I by denition of A
b
j
and it follows that the additional request in I

will be rejected by policy


b (because k j). Therefore, policy b obtains the same online revenues from sequences I and I

. However,
oine revenues for I

will be no less than that of I. Therefore the resultant ratio of online revenues to oine
revenues cannot increase if sequence I is adjusted to I

. One can continue appending requests to sequence I


until I[k] =U
k
for all k j. The resulting sequence may not be LBH, but can be converted to one without
loss of generality: see Proposition 1 and our discussion above.
Now consider I[k] =L
k
with k <j. Suppose there is a k <j such that I[k] >L
k
, and consider removing a
class k request from I, resulting in a sequence I

. Since I is a LBH sequence in category A


b
j
where j >k, the
resultant online revenue is simply reduced by f
k
: R(I

; b) =R(I; b) f
k
. As for the oine optimal revenue,
we obviously have R

(I

) R

(I) f
k
. Given that R

(I) R(I; b) f
k
>0, the resultant ratios satisfy
R(I

; b)
R

(I

)

R(I; b) f
k
R

(I) f
k

R(I; b)
R

(I)
.
We continue creating new sequences based on these adjustments until we obtain I[k] =L
k
for all k <j. Thus,
after nite number of adjustments without ever increasing the CR, the desired LBH sequence is reached
from any sequence within the given category.
Y.Lan, H.Gao, M.Ball, I.Karaesmen: Revenue Management with Limited Demand Information
4 to appear in Management Science; manuscript no. XXX
Appendix C: Parameter Relationships in the GBM and Proof of Proposition 3
In this Section we examine the coecients in the constraints of GBM and derive some useful relationships
that will serve as the basis for our ability to solve GBM in closed-form. These relationships reect the
structure of the oine optimal revenues of the CASTs.
For the sake of mathematical completeness in investigating the relationship among the problem parameters,
we utilize a virtual fare class m+1 with f
m+1
=0. So, instead of looking at an m-fare problem, we are now
looking at an m+1-fare problem. We refer to the GBM model that includes the virtual class m+1 as the
virtual extension of GBM. We rst clarify the notation for the virtual extension of GBM and introduce the
shorthand notation used in this section.
We set L
m+1
=0 for the virtual class. Let N
j
=n

j1
i=1
L
i
, j =1, 2, , m+1. Remember that

m1
i=1
L
i
<
n (see the discussion in Section 4.2). Therefore, we have N
m
>0. Note that L
m
does not aect any parameters
in the original GBM, so we can set L
m
= min(U
m
, N
m
) > 0, so that N
m+1
0. Also, we set U
m+1
= n, so
we will always have at least n requests in CAST
j
, for all j = 1, 2, , m + 1. Let R

j
= R

(CAST
j
), and
R
+
j
=

j1
i=1
L
i
f
i
for all j =1, 2, , m+1. We have R

m+1
=R
+
m+1
>0 because N
m
>0, L
m
>0 and f
m+1
=0.
With this shorthand notation, we can rewrite g
i
= (R

i
R

i+1
)/f
i
0, i = 1, ..., m from (9). For any input
sequence I, let I(k) denote the fare class of the k
th
request in I, and I(k) denote the fare class of the k
th
request counting backwards in I, for all k =1, 2, ..., |I| where |I| =

m
j=1
I[j] is the total number of requests
in sequence I.
Our initial goal is to derive the following relationship:
N
m+1
=n
m

i=1
L
i

m

i=1
g
i
. (20)
We will also use later some of the inequalities derived along the way.
The oine optimal revenue from an input I is simply the sum of the fares from the n highest requests in
I. As any CAST
j
is LBH, we have
R

j
=
n

k=1
f
CAST
j
(k)
. (21)
We rst seek to derive a relationship between R

j
and R

j+1
. Observe that CAST
j+1
can be obtained from
CAST
j
by taking out U
j
L
j
fare class j m requests. As

j
i=1
L
i
<n, we know that some of those U
j
L
j
requests belong to the n highest-fare requests in CAST
j
. Thus, some of the n highest-fare requests in CAST
j
are missing from CAST
j+1
, and some of the succeeding requests must take the place of these missing
requests. Depending on the value of U
j
+

j1
i=1
L
i
, we have two cases:
Y.Lan, H.Gao, M.Ball, I.Karaesmen: Revenue Management with Limited Demand Information
to appear in Management Science; manuscript no. XXX 5
Case 1: If U
j
+

j1
i=1
L
i
n, then all of the U
j
L
j
belong to the n highest-fare requests in CAST
j
.
Thus, exactly U
j
L
j
of the n highest-fare requests in CAST
j
are missing from CAST
j+1
, and the next
U
j
L
j
highest-fare requests are used in determining R

j+1
. So we have:
R

j+1
=R

j
(U
j
L
j
)f
j
+
n+U
j
L
j

k=n+1
f
CAST
j
(k)
. (22)
Case 2: If U
j
+

j1
i=1
L
i
>n, then U
j
+(

j1
i=1
L
i
) n of the U
j
L
j
are not in the highest n requests in
CAST
j
. Thus, only U
j
L
j
[U
j
+(

j1
i=1
L
i
) n] =N
j+1
of the highest n requests from CAST
j
are missing
from CAST
j+1
. These are N
j+1
highest requests following the rst U
j
+

j1
i=1
L
i
highest requests in CAST
j
.
But note that, in CAST
j
, the highest requests ranked between n +1 and U
j
+

j1
i=1
L
i
all belong to fare
class j. This gives us a total of U
j
+(

j1
i=1
L
i
) n =U
j
L
j
N
j+1
requests of class j. So we have:
R

j+1
=R

j
N
j+1
f
j
+
n+U
j
L
j

k=n+1
f
CAST
j
(k)
(U
j
L
j
N
j+1
)f
j
, (23)
which turns out to be identical to (22).
Consider the U
j
L
j
requests that follow the n highest-fare requests in CAST
j
. For j m, let Q
j
be the
number of such requests, where requests in the virtual class are excluded. Also let

f
j
denote the average fare
of these Q
j
requests, so we have
n+U
j
L
j

k=n+1
f
CAST
j
(k)
=Q
j

f
j
. (24)
As none of the Q
j
requests has a fare higher than f
j
, we have

f
j
f
j
and
g
i
=(R

i
R

i+1
)/f
i
=U
i
L
i
Q
i

f
i
/f
i
U
i
L
i
. (25)
As we build the relationships between two consecutive CASTs in this way, starting with CAST
1
and
ending with CAST
m+1
, all the requests not among the n highest of CAST
1
can contribute to a Q
j
for some
j at most once, so we have
m

j=1
Q
j

m

i=1
U
i
n. (26)
The preceding analysis implies:
m

i=1
g
i
=

m
i=1
(U
i
L
i
)

m
i=1
Q
i

f
i
/f
i

m
i=1
(U
i
L
i
)

m
i=1
Q
i

m
i=1
(U
i
L
i
) (

m
i=1
U
i
n)
=n

m
i=1
L
i
=N
m+1
.
Y.Lan, H.Gao, M.Ball, I.Karaesmen: Revenue Management with Limited Demand Information
6 to appear in Management Science; manuscript no. XXX
We have now proved relationship (20), which plays an important role in our presentation of closed-form
solutions to the GBM below. We use the shorthand dened in this appendix, instead of the explicit notation of
the main text, for convenience of discussion. We leave it for the reader to verify that the following statements
are the same as in the main text.
Proposition 3 (a) The optimal solution of GBM is
z
CR
=
R
+
u
/f
u
+N
u
R

u
/f
u
+

u1
i=1
g
i
x
CR
j
=
_
_
_
g
j
z
CR
+L
j
j <u
(R

u
z
CR
R
+
u
)/f
u
j =u
0 j >u
u = max{j m: R
+
j
j1

i=1
g
i
<N
j
R

j
}
where the index u denotes the critical fare class such that all classes k >u are closed.
(b) The nested booking limits dened by
b
CR
j
=
m

i=j
x
CR
i
for j =1, , m (27)
maximizes the CR in problem (1) and the optimal CR is z
CR
= z
CR
.
Proof (a) Using condition (20), we see that the u obtained in (8) is the same as
u =max{j m: R
+
j
j1

i=1
g
i
<N
j
R

j
}.
This fact and R

m+1
=R
+
m+1
immediately imply u m. We also see that u 1. Observe that R
+
j

j1
i=1
g
i
is
non-decreasing in j and is equal to 0 for j =1; and that N
j
R

j
is decreasing in j, starting from nR

1
>0 for
j =1. So u is well dened in the range 1 u m.
Consider the system of the linear equations below:
R

j
z =R
+
j
+
u

i=j
f
i
x
i
j =1, , u
u

i=1
x
i
=n.
The closed-form solution to this system, denoted z

, x

i
, is given by
z

= (R
+
u
/f
u
+N
u
)/(R

u
/f
u
+
u1

i=1
g
i
)
x

u
= (R

u
z

R
+
u
)/f
u
x

j
= g
j
z

+L
j
, 1 j <u
Y.Lan, H.Gao, M.Ball, I.Karaesmen: Revenue Management with Limited Demand Information
to appear in Management Science; manuscript no. XXX 7
This turns out to be the optimal solution to GBM, after we set x

i
=0, i >u. Some of the constraints were
not part of the equation system used to obtain the above solution; we now need to show that they are all
satised. With z

>0, it becomes obvious that x

i
0, i =u. We still need to show x
u
0. By the denition
of u, we have
R
+
u

u1
i=1
g
i
<N
u
R

u
.
By adding R
+
u
R

u
/f
u
to both sides of the inequality and regrouping the terms, we get
R
+
u

u1
i=1
g
i
+R
+
u
R

u
/f
u
<N
u
R

u
+R
+
u
R

u
/f
u
R
+
u
(R

u
/f
u
+

u1
i=1
g
i
) <(N
u
+R
+
u
/f
u
)R

u
.
By the denition of z

and our preceding analysis we now have:


R
+
u
<z

u
,
and we get
x

u
=(R

u
z

R
+
u
)/f
u
>0.
Next we show that the constraints of R

j
z R
+
j
+

m
i=j
f
i
x
i
, j > u are satised. Since x

i
= 0, i > u, these
constraints reduce to zR

j
R
+
j
, j >u. Observing the monotonicity of R
+
j
/R

j
in j, we see that we only need
to show z

u+1
R
+
u+1
. By the denition of u, we have:
R
+
u+1

u
i=1
g
i
N
u+1
R

u+1
.
We divide both sides by f
u
and add N
u+1

u
i=1
g
i
to both sides to obtain:
(R
+
u+1
/f
u
+N
u+1
)

u
i=1
g
i
N
u+1
(R

u+1
/f
u
+
u

i=1
g
i
).
Regrouping the terms and replacing z

with the appropriate terms, we get:


(R
+
u
/f
u
+N
u
)

u
i=1
g
i
N
u+1
(R

u
/f
u
+
u1

i=1
g
i
)
z

u
i=1
g
i
N
u+1
=N
u
L
u
Finally, rearranging the terms and adding R
+
u
/f
u
to both sides of the inequality we have:
R
+
u
/f
u
+N
u
z

u
i=1
g
i
R
+
u
/f
u
+L
u
=R
+
u+1
/f
u
.
Y.Lan, H.Gao, M.Ball, I.Karaesmen: Revenue Management with Limited Demand Information
8 to appear in Management Science; manuscript no. XXX
Since R
+
u
/f
u
+N
u
= z

(R

u
/f
u
+

u1
i=1
g
i
), we have: z

(R

u
/f
u
g
u
) = z

u+1
/f
u
R
+
u+1
/f
u
. The proof is
valid for j =m+1, so we have z

R
+
m+1
/R

m+1
=1.
We now show that the upper bound constraints x
i
U
i
, i = 1, , m also hold. First we show that x

u

z

g
u
+L
u
:
z

u+1
R
+
u+1
z

(R

u
g
u
f
u
) R
+
u
+L
u
f
u
x

u
=(z

u
R
+
u
)/f
u
z

g
u
+L
u
Given g
i
U
i
L
i
and z

1, we have x
i
z

g
i
+L
i
U
i
for i u, and x

i
=0 U
i
for i >u. This concludes
the proof of feasibility of the solution.
To prove optimality, we consider the dual of GBM, with variables v, y
j
, w
j
:
min nv +

m
j=1
(R
+
j
y
j
+U
j
w
j
)
s.t.

m
j=1
R

j
y
j
1
w
j
+v

j
i=1
f
j
y
i
0 j =1, ..., m
v 0, y
j
, w
j
0 j =1, ..., m
A dual feasible solution is constructed as
y
j
=
_
v(1/f
j
1/f
j1
) j u
0 j >u
v = 1/(R

u
/f
u
+
u1

i=1
g
i
)
w
j
= 0 j
where f
0
= for convenience. So the solution is optimal for GBM, and we let x
CR
=x

, z
CR
=z

.
(b) We show optimality of the policy b
CR
to the CR problem. As discussed in the main text, GBM provides
an upper bound on the true objective function, z
CR
, of the CR problem. To prove that b
CR
is the optimal
nested booking limit policy that maximizes CR, we need to show that z
CR
=z
CR
. Obviously, when k u,
R
+
k
gives the exact value for the revenues generated by x
CR
from the requests in classes from 1 through k 1
in CAST
k
. A discrepancy occurs only when k >u. Noting that x
CR
k
=0, we have
R(CAST
k
; b
CR
) =R(CAST
u+1
; b
CR
) =f
u
min(x
CR
u
, L
u
) +R
+
u
=min(R(CAST
u
; b
CR
), R
+
u+1
).
Y.Lan, H.Gao, M.Ball, I.Karaesmen: Revenue Management with Limited Demand Information
to appear in Management Science; manuscript no. XXX 9
The monotonicity of R

k
with respect to k allows that
R(CAST
k
; b
CR
)
R

k
min(
R(CAST
u
; b
CR
)
R

u
,
R
+
u+1
R

u+1
) z
CR
.
So, z
CR
=z
CR
.
Appendix D: Proof of Theorem 1
Theorem 1 For the continuous m-fare problem with demand bounds, the nested booking control policy with
booking limit vector b
CR
dened by (11) has a CR of z
CR
given by (6) and this is the best possible among
deterministic policies.
Proof Earlier results showed that b
CR
dened by (11) has a CR of z
CR
given by (6). Thus, to prove this
Theorem, we need only show that an arbitrary policy P can do no better. The only requirement we place
on P is that it should accept/reject all portions of a request upon its arrival. We generate an input sequence
by specifying the actions of an adversary that can observe each of Ps decisions and immediately react
by manipulating future input. The performance of P on this input sequence will be no better than z
CR
implying the result. When specifying the adversarys actions, we characterize the policys eect by dening
an eective booking limit vector, b
P
, and bucket size vector, x
P
. Consider the following adversary strategy:
Step 0: let the current fare index

i =m+1 and its eective booking limit b
P

i
=0;
Step 1: set

i =

i 1, send in U

i
class

i requests;
Step 2: set x

i
to the number of class

i requests accepted by P;
Step 3: let the eective booking limit be b
P

i
=b
P

i+1
+x
P

i
;
Step 4: if b
P

i
b
CR

i
and

i >1 then go to step 1);
Step 5: if b
P

i
<b
CR

i
, send in the rest of CAST

i
.
The execution of this strategy will terminate having generated the input sequence CAST

i
. Dene the
vector b
CR
as the optimal nested booking limit vector obtained using GBM, i.e., b
CR
j
=

m
i=j
x
CR
i
for all
j =1, .., m. The conditions in steps 4 and 5 above imply that b
P
j
b
CR
j
for j >

i and b
P

i
b
CR

i
, which, in turn,
imply that the revenue of policy P based on classes k >

i is no greater than the corresponding revenue of


the optimal nested policy b
CR
. The revenue from classes k

i 1 would be at most

i1
k=1
L
i
f
i
, which is the
revenue obtained by the optimal nested policy b
CR
. Combining these two revenue portions, we have that the
Y.Lan, H.Gao, M.Ball, I.Karaesmen: Revenue Management with Limited Demand Information
10 to appear in Management Science; manuscript no. XXX
revenue of P cannot be higher than that of the optimal nested policy b
CR
. Hence, policy b
CR
is better (or
no worse) than any other arbitrary policy. This then implies the CR is at most z
CR
, and the nested booking
control policy b
CR
that achieves z
CR
is the best possible among all deterministic policies.
Appendix E: Proof of Corollary 1
Corollary 1 For the continuous m-fare problem with all lower bounds equal to zero, the nested booking
control policy with booking limits dened by:
b
CR
i
=n

m
j=i
g
i

m
j=1
g
j
for i =2, ..., m
has a CR of n/(

m
j=1
g
j
) and this is the best possible among deterministic policies.
Proof We use the shorthand notation introduced in Appendix C above in this proof. When the lower
bounds are all zero (L
i
=0, i =1, , m), it can easily be seen that R
+
i
=0, N
i
=n for all i =1, , m and
the GBM reduces to the Upper Bound Model (UBM) below:
UBM: max z
s.t. R

j
z
m

i=j
f
i
x
i
, j =1, , m (28)
m

i=1
x
i
n (29)
0 x
j
U
j
, j =1, ..., m. (30)
To derive the optimal solution to UBM, the upper bound constraints in (30) are dropped, and we assume
the remaining constraints in (28) and (29) are binding. We solve a linear system of equations with m+1
variables. The solution z

, x

i
to this system is:
z

=n/
m

i=1
g
i
and x

i
=g
i
z
CR
, i =1, , m; (31)
where
g
i
=
R

i
R

i+1
f
i
i =1, , m (32)
with R

m+1
= 0. Note that g
i
U
i
and 0 z

1, hence x

i
=g
i
z

U
i
, which implies that constraint (30)
is satised. Hence, the solution provided in (31) is feasible for UBM. We consider the dual formulation of
UBM in order to show that this solution is optimal:
min nv
Y.Lan, H.Gao, M.Ball, I.Karaesmen: Revenue Management with Limited Demand Information
to appear in Management Science; manuscript no. XXX 11
s.t.
m

j=1
R

j
y
j
1
v f
j
j

i=1
y
i
j =1, ..., m
v 0, y
j
0 j =1, ..., m.
By treating the rst two constraint sets as equalities and solving this system of linear equations, we obtain
the following dual solution: v

=z

/n, y

j
=v

/f
j
v

/f
j1
, where we dene f
0
=+ for convenience. It is
easy to verify that this dual solution is both feasible and has the same objective function value as the primal
solution obtained in (31). This proves that x
CR
=x

is the optimal solution to UBM and the optimal CR is


z
CR
=z

.
Appendix F: Proof of Theorem 2
Theorem 2 For the continuous m-fare problem with demand bounds, no randomized booking control policy
has a CR larger than z
CR
given in (6). Therefore, the deterministic nested booking control policy with booking
limits by b
CR
in (11) is the best possible among all policies.
Proof (Some of the shorthand notation introduced in Appendix C is used in this proof.) Let

D denote the
set of all deterministic policies for this problem. Let be the set of all probability distributions on

D. Any
randomized policy may be viewed as a random choice

D( p) among deterministic policies, dened by some
probability distribution p . On the other hand, the adversary makes a choice among the input sequences
I (L, U). Using as a payo function the expected CR, we dene a zero-sum two-person game between a
seller choosing a randomized policy to maximize her expected CR and an adversary choosing a distribution
of input sequences to minimize this expected ratio. The von Neuman/Yao principle (e.g., see Seiden, 2000)
implies that the best possible CR of any randomized policy satises
z

=sup
p
inf
I
E
p
_
R(I;

D( p))
R

(I)
_
= inf
q
sup

D
E
q
_
R(I(q);

d)
R

(I(q))
_
where denotes the set of all probability distributions on set , and I(q) is a random sequence chosen
according to probability distribution q . The right hand side of this equality may be interpreted as the
adversarys problem of choosing a probability distribution of input sequences to force every deterministic
policy to experience an expected competitive ratio at most z

. We note that, since we have shown that z


CR
is the best possible CR for a deterministic policy and a deterministic policy is a special case of a randomized
Y.Lan, H.Gao, M.Ball, I.Karaesmen: Revenue Management with Limited Demand Information
12 to appear in Management Science; manuscript no. XXX
one, it is clear that z
CR
z

. To prove the result we will show that z

z
CR
. This will be accomplished by
showing for a particular q

,
sup

D
E
q

_
R(I(q

);

d)
R

(I(q

))
_
z
CR
If this inequality holds for a particular q

, it must hold for the inmum over all q .


We dene the q

as follows. Set q =1/(

iq
(f
1
i
f
1
i1
)R

i
) and q

i
= q(f
1
i
f
1
i1
)R

i
, i u. We can then
choose input CAST
i
with probability q

i
. Let X
k
i
(

d) denote the number of accepted requests in class i when


deterministic online policy

d

D is applied to CAST
k
, and R(I;

d) denote the online revenue generated by

d
from input sequence I. Since CAST
k
and CAST
1
are LBH sequences and they are identical before any k 1
class request is seen, we have X
k
j
(

d) =X
1
j
(

d), j k. On the other hand, X


k
j
(

d) CAST
k
[j] =L
j
, j <k, so:
R(CAST
k
;

d) =
m

j=1
f
j
X
k
j
(

d) (33)
R
+
k
+
u

j=k
f
j
X
1
j
(

d) +f
u
m

j=u+1
X
1
j
(

d), k u. (34)
The above expression now enables us to derive a relationship between the performance under an arbitrary

d
and the performance of the best nested booking limit policy dened by x
CR
in (7):
E
q

_
R(I(q

);

d)
R

(I(q

))
_
=
u

k=1
q

k
R(CAST
k
;

d)
R

(CAST
k
)
=
u

k=1
q(f
1
k
f
1
k1
)R(CAST
k
;

d)
Using the relationship in (34),

k=1
q(f
1
k
f
1
k1
)(R
+
k
+
u

j=k
f
j
X
1
j
(

d) +f
u
m

j=u+1
X
1
j
(

d)) (35)
=
u

k=1
q(f
1
k
f
1
k1
)R
+
k
+ q
m

k=1
X
1
k
(36)

k=1
q(f
1
k
f
1
k1
)R
+
k
+ q
m

k=1
x

k
(37)
= z
CR
(38)
The term in (36) is obtained by algebraic manipulation. The inequality in (37) results since

m
k=1
X
1
k

n =

m
k=1
x
CR
k
. The nal equation follows because the CR achieved by x
CR
equals z
CR
for CAST
k
, k u.
Therefore no randomized policy has a CR greater than z
CR
; this completes the proof.
Y.Lan, H.Gao, M.Ball, I.Karaesmen: Revenue Management with Limited Demand Information
to appear in Management Science; manuscript no. XXX 13
Appendix G: Randomized Policies for the Discrete CR Problem
A randomized policy consists of a policy set and a discrete probability distribution over the policy set. The
policy set is a nite set of deterministic, discrete (integral) policies. We will rst use the solution x
CR
given
in equation (7) to construct a policy set. Then we prove that there always exists a discrete probability
distribution over that policy set such that the randomized policy is optimal.
Note that

u
i=1
x
CR
i
=n because we exclude the trivial cases from our analysis. Each of the deterministic
policies will be dened by rounding up or down each fractional x
CR
i
, and any integral x
CR
i
can be simply
left unchanged. For convenience, we assume that x
CR
i
, i = 1, , u are all fractional. Let p
i
=x
CR
i
x
CR
i

denote the fractional part of x
CR
i
, and r =

u
i=1
p
i
< u denote the sum of the fractional parts. Note that
r =n

u
i=1
x
CR
i
must be integral and satisfy u > r >0. For each s {1, , u}, with |s| = r, we dene a
deterministic policy based on x
s
given by:
x
s
i
= x
CR
i
+1{i s}, i =1, , u (39)
where 1{} is the indicator function. Notice each policy dened in this way satises x
s
i
L
i
, i <u, U
i
x
s
i
, i
u, and

u
i=1
x
s
i
= n. All of these deterministic integral policies are feasible for GBM and there are
_
u
r
_
in
total. These policies form the policy set for our random policy. We now need to nd a probability q
s
for each
policy x
s
, subject to

s:is
q
s
= p
i
, i =1, , u (40)
q
s
0 and

s
q
s
=1. (41)
Note that (41) ensures q
s
represents a probability distribution, and (40) implies E[x
s
i
] = x
CR
i
, i = 1, , u.
Let us assume for now that there exists such a set of q
s
, which we will prove shortly in Lemma 1 (see below).
To show that this randomized policy achieves the optimal performance, we examine its expected perfor-
mance on the CASTs. The analysis provided in Section 4.2 shows that the performance of the policy x
s
upon
CAST
j
is exactly

j1
i=1
f
i
L
i
+

u
i=j
f
i
x
s
i
. For all j u, the expected performance can then be obtained as
follows:
E
_
j1

i=1
f
i
L
i
+
u

i=j
f
i
x
s
i
_
=
j1

i=1
f
i
L
i
+
u

i=j
f
i
E[x
s
i
]
= R
+
j
+
m

i=j
f
i
x
CR
i
= z
CR
R

j
Y.Lan, H.Gao, M.Ball, I.Karaesmen: Revenue Management with Limited Demand Information
14 to appear in Management Science; manuscript no. XXX
where the nal equality in the equation is implied by the properties of the optimal solution of GBM (see
Appendix C above). For j >u, the nal equality above is replaced by the inequality .
Therefore, the expected performance of the randomized policy on each of the CASTs is exactly the same
as the performance of the best deterministic policy for the continuous problem, which proves that the
randomized policy on the discrete problem achieves the same CR as the optimal deterministic policy applied
to the continuous problem. It remains to show that the probabilities of q
s
indeed exist; see the next result.
Lemma 1 Given 0 p
i
1 for i = 1, , u and 0 <

u
i=1
p
i
= r <u, there always exists a solution q
s
to
the system of (40) and (41).
Proof We prove the result by induction on the pair ( r, u). Notice that when r = 1, the solution is q
{i}
=
p
i
, i =1, , u. Also, when u r =1 the solution is obviously q
{1, ,u}\i
= p
i
, i =1, , u, where p
i
=1 p
i
>
0, i =1, , u. It remains to show that for any ( r, u), with r >1 and u r >1, a solution can be found if any
system of (u

, r

), with u

<u and r

r, has a solution.
As indicated earlier, without loss of generality, we assume 0 <p
i
<1 for all i. Let t
i
0, i = 1, , u 1
satisfy

u1
i=1
t
i
=p
u
p
u
and 0 t
i
min(p
u
p
i
, p
u
p
i
). Obviously, such t exists if
p
u
p
u

u1

i=1
min(p
u
p
i
, p
u
p
i
). (42)
We will now prove that this inequality holds. First note that min(X, Y ) =X [X Y ]
+
, so we have
min(p
u
p
i
, p
u
p
i
) =p
u
p
i
[p
u
p
i
p
u
p
i
]
+
=p
u
p
i
[p
u
+p
i
1]
+
.
We dene set K such that i K if and only if p
u
+p
i
1 >0. The following sequence of inequalities are all
equivalent to (42):
p
u
p
u

u1

i=1
(p
u
p
i
[p
u
+p
i
1]
+
)

iK
[p
u
+p
i
1]
+

u1

i=1
p
u
p
i
p
u
p
u

iK
(p
u
+p
i
1) p
u
( r 1)
|K|p
u
|K| +

iK
p
i
p
u
( r 1) (43)
Thus, we can now show that (42) holds by proving (43). We consider two cases:
Y.Lan, H.Gao, M.Ball, I.Karaesmen: Revenue Management with Limited Demand Information
to appear in Management Science; manuscript no. XXX 15
Case 1: |K| r. Noting that

iK
p
i
r p
u
, it follows that
|K|p
u
|K| +

iK
p
i
|K|p
u
|K| + r p
u
= p
u
( r 1) p
u
(|K| r).
Now inequality (43) follows since the condition of Case 1 implies p
u
(|K| r) 0.
Case 2: |K| < r. We have

iK
p
i
|K|, so
|K|p
u
|K| +

iK
p
i
|K|p
u
p
u
( r 1).
and inequality (43) follows.
For all i = 1, , u 1, let p
0
i
= p
i
+t
i
/ p
u
, and p
1
i
= p
i
t
i
/p
u
, so we can have p
i
= p
0
i
p
u
+p
1
i
p
u
. From
the constraints put on t, we obviously have 0 p
0
i
1, 0 p
1
i
1 and

u1
i=1
p
0
i
= r,

u1
i=1
p
1
i
= r 1. By the
assumption of induction, we know both systems have a solution, and let them be q
0
s
, q
1
s
respectively. Note
that the subscripts for q
0
s
are sets with |s| = r, while those for q
1
s
satisfy |s| = r 1. Let q
s
be dened as
q
s
=
_
p
u
q
0
s
, u / s
p
u
q
1
s\u
, u s.
(44)
We can directly verify that q
s
is a solution to the system with ( r, u), which is omitted here.
Based on the proof of Lemma 1, one can develop an ecient algorithm to generate the randomized policies.
The algorithm chooses the non-zero probability values without the need for complete enumeration of the
policy set; details are omitted. (The algorithm is included in the ongoing doctoral dissertation of the rst
author, Yingjie Lan, at University of Maryland, College Park, MD.)
Appendix H: Dynamic Policies
Given the adjusted bounds

L,

U, remaining capacity n, number of accepted requests h
i
, i = 1, ..., m, and
the partial input sequence I
0
, the new values of nested booking limits

b and bucket sizes x that improve the
minimum CR and maximum MAR are obtained by solving the problems in (18) and (19), respectively.
The structure of the optimal policy is the same as in GBM (GBM-AR), except that some parameters
are replaced. We use n for n,

L
i
for L
i
. The CASTs for the set of partial input sequences are now dened
over the set (

L,

U). We denote the new CAST by CAST

. By denition, CAST

j
[k] =

U
k
for k j, and
CAST

j
[k] =

L
j
for k <j.
Y.Lan, H.Gao, M.Ball, I.Karaesmen: Revenue Management with Limited Demand Information
16 to appear in Management Science; manuscript no. XXX
The new bucket sizes x
CR
that improve minimum CR are expressed as:
z
CR
=
(1/f
u
)(

m
i=1
h
i
f
i
+

u1
i=1
f
i

L
i
) +( n

u1
i=1

L
i
)
+
R

(I
0
CAST

u
)/f
u
+

u1
i=1
g
i
(45)
x
CR
j
=
_
_
_
g
j
z
CR
+

L
j
j < u
(1/f
u
)(R

(I
0
CAST

u
) z
CR

m
i=1
h
i
f
i

u1
i=1
f
i

L
i
) j = u
0 j > u
(46)
u = max{j m:
j1

i=1
g
i
<
R

(I
0
CAST

j
)( n

j1
i=1

L
i
)
+

m
i=1
h
i
f
i
+

j1
i=1
f
i

L
i
} (47)
where the index u denotes the critical fare-class such that all classes k > u are closed, and g
i
is an auxiliary
parameter dened as
g
m
=R (I
0
CAST
m
)/f
m
, g
i
=
R

(I
0
CAST

i
) R

(I
0
CAST

i+1
)
f
i
, i =1, .., m1. (48)
Likewise, the new bucket sizes x
AR
that improve MAR are expressed as:
z
AR
= R

(I
0
CAST

u
)
m

i=1
h
i
f
i

i=1
f
i

L
i
f
u
x
AR
u
(49)
x
AR
j
=
_
_
_
g
j
+

L
j
j < u

( n

1
i=1

L
i
)
+

i< u

g
i
j = u

0 j > u

(50)
u

= max{j m:

i<j
g
i
<( n
j1

i=1

L
i
)
+
.} (51)
One key observation pertaining to our dynamic policies is the following: Static and dynamic policies are
identical under LBH input sequences when m= 2 but not when m>2. This is because the only mistake
the adversary can make in LBH sequences is in the total amount of requests of each class (not the sequence
of arrivals because the sequence is LBH). When m = 2, the only inputs of interest, CASTs, call for the
adversary to send U
2
class-2 requests rst. The mistake implies the adversary switches to sending class-1
requests earlier than expected. Resolving the problem and re-allocating the seats between classes does not
improve the worst-case performance in this case, because there cannot be any more class-2 requests in a
LBH input after the arrival of the rst class-1 request.
Appendix I: Numerical Examples
The results of the computational experiments in this section complement the ones in the main text.
Example-1b. This example is the same as Example-1a of Section 7 except for the demand mix: the
lower and upper bounds on demand are L
1
=20, U
1
=60, L
2
=60 and U
2
=100, i.e., the mean demand for
class-1 is lower. The revenue percentiles for the policies are presented in Figure 6. In this case, no policy
Y.Lan, H.Gao, M.Ball, I.Karaesmen: Revenue Management with Limited Demand Information
to appear in Management Science; manuscript no. XXX 17
50000
60000
70000
80000
90000
100000
110000
120000
130000
10% 30% 50% 70% 90%
percentile
p
o
l
i
c
y

r
e
v
e
n
u
e

(
$
)
OFFLINE BDYN-CR, BSTAT-CR
DYN-CR, STAT-CR BDYN-AR, BSTAT-AR
DYN-AR, STAT-AR FCFS
Figure 6 Distribution of revenues for each policy in Example-1b
(except OFFLINE) is stochastically dominant (as observed numerically). This particular demand mix aects
STAT-AR most: It has a signicantly lower revenue at the 10
th
percentile, and provides the second highest
revenue value at the 90
th
percentile, following BSTAT-AR. This is expected because STAT-AR protects the
highest number of seats for class-1, for which the demand is lower in this case. The observations regarding
the relative performances of the other policies remain the same.
Example-1c. This example is the same as Example-1a of Section 7 except the demand mix: the lower
and upper bounds on demand are L
1
=60, U
1
=100, L
2
=20 and U
2
=60, i.e., the mean demand for class-
1 is higher. The revenue percentiles for the policies are presented in Figure 7. In this case, STAT-CR is
stochastically dominated (numerically) because its booking limit for class-2 is signicantly higher than those
of other policies. When the arrivals occur homogeneously over time in both fare classes, dynamic and static
policies are not equivalent. If demand mix is balanced as in Example-1a, then the average revenues obtained
by each of the policies except DYN-AR are higher when arrivals are time-homogeneous; DYN-AR sets a
low booking limit for class-2 initially, and this booking limit is updated with each class-1 request leading to
rejecting far too many class-2 requests and having too many empty seats at the end of the booking horizon.
However, DYN-AR is not stochastically dominated (based on numerical observations), i.e., it has a higher
90
th
percentile than, for e.g., BSTAT-AR.
Y.Lan, H.Gao, M.Ball, I.Karaesmen: Revenue Management with Limited Demand Information
18 to appear in Management Science; manuscript no. XXX
100000
120000
140000
160000
180000
200000
10% 30% 50% 70% 90%
percentile
p
o
l
i
c
y

r
e
v
e
n
u
e
OFFLINE FCFS BDYN-CR, BSTAT-CR
DYN-CR, STAT-CR BDYN-AR, BSTAT-AR DYN-AR, STAT-AR
Figure 7 Distribution of revenues for each policy in Example-1c
These experiments are repeated by changing the arrival regime. Our previous observations regarding
stochastic dominance relations among the policies do not change with the arrival regime. The next three
examples provide the revenue percentiles for these experiments when arrivals are time-homogeneous.
Example-1d. This example is the same as Example-1a of Section 7 except that the requests in each fare
class arrive homogeneously over time. The revenue percentiles for the policies are presented in Figure 8.
Example-1e. This example is the same as Example-1b above except that the requests in each fare class
arrive homogeneously over time. The revenue percentiles for the policies are presented in Figure 9.
Example-1f. This example is the same as Example-1c above except that the requests in each fare class
arrive homogeneously over time. The revenue percentiles for the policies are presented in Figure 10.
Example-2b. This example is the same as Example-2a of Section 7 except for the demand mix: demand is
distributed uniformly between 30 and 50 for class-1, and between 70 and 90 for class-2. The average relative
performance of each policy is reported in Figure 11. In this case, the relative performance of policies with
demand bounds is again indistinguishable and is insensitive to the changes in the fare ratio. However, the
relative performance of policies with no demand information is dierent: more demand for class-2 favors
STAT-CR and DYN-CR, and these policies perform as well as the policies with demand bounds when the
fare ratio is low. The performances of STAT-AR and DYN-AR are adversely aected by this demand mix
when the fare ratio is low (e.g. their average relative performance is 84% for r = 0.2 as opposed to 94% in
Y.Lan, H.Gao, M.Ball, I.Karaesmen: Revenue Management with Limited Demand Information
to appear in Management Science; manuscript no. XXX 19
90000
100000
110000
120000
130000
140000
150000
160000
10 30 50 70 90
percentile
p
o
l
i
c
y

r
e
v
e
n
u
e
OFFLINE FCFS BDYN-CR
DYN-CR DYN-AR BSTAT-CR
STAT-CR STAT-AR BDYN-AR~BSTAT-AR
Figure 8 Distribution of revenues for each policy in Example-1d
52000
62000
72000
82000
92000
102000
112000
122000
132000
10 30 50 70 90
percentile
p
o
l
i
c
y

r
e
v
e
n
u
e
OFFLINE FCFS BDYN-CR DYN-CR
BDYN-AR DYN-AR BSTAT-CR STAT-CR
BSTAT-AR STAT-AR
Figure 9 Distribution of revenues for each policy in Example-1e
Figure 2). When demand is distributed uniformly between 20 and 60 for class-2, and between 60 and 100
for class-1, then MAR policies have slightly better performance compared to CR when demand information
is used. Low r and high demand for class-1 favor BSTAT-AR (BDYN-AR). The eect of time-homogeneous
Y.Lan, H.Gao, M.Ball, I.Karaesmen: Revenue Management with Limited Demand Information
20 to appear in Management Science; manuscript no. XXX
125000
135000
145000
155000
165000
175000
185000
195000
10 30 50 70 90
percentile
p
o
l
i
c
y

r
e
v
e
n
u
e
OFFLINE FCFS~STAT-CR
DYN-CR DYN-AR
BDYN-AR~BSTAT-AR STAT-AR
BDYN-CR~BSTAT-CR
Figure 10 Distribution of revenues for each policy in Example-1f
0.84
0.86
0.88
0.9
0.92
0.94
0.96
0.98
1
0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1
fare ratio (r)
a
v
e
r
a
g
e

o
f

r
a
t
i
o
n

o
f

p
o
l
i
c
y

r
e
v
e
n
u
e

t
o

O
F
F
L
I
N
E

r
e
v
e
n
u
e
BDYN-AR, BSTAT-AR DYN-AR, STAT-AR
BDYN-CR, BSTAT-CR DYN-CR, STAT-CR
FCFS
Figure 11 Average relative performance of policies in Example-2b
arrivals on our policies, in general, is the same as in Example-1a.
Example-4 (extended). Here, we report extended results on Example-4 of Section 7, including the
performance of policies that use no demand information. When arrivals are time-homogeneous (see Figure
Y.Lan, H.Gao, M.Ball, I.Karaesmen: Revenue Management with Limited Demand Information
to appear in Management Science; manuscript no. XXX 21
0.8
0.84
0.88
0.92
0.96
1
[
1
2
0
,
0
]
[
1
1
0
,
1
0
]
[
1
0
0
,
2
0
]
[
9
0
,
3
0
]
[
8
0
,
4
0
]
[
7
0
,
5
0
]
[
6
0
,
6
0
]
[
5
0
,
7
0
]
[
4
0
,
8
0
]
[
3
0
,
9
0
]
[
2
0
,
1
0
0
]
[
1
0
,
1
1
0
]
[
0
,
1
2
0
]
mean demand [
2
,
1
]
a
v
e
r
a
g
e

o
f

r
a
t
i
o

o
f

p
o
l
i
c
y

r
e
v
e
n
u
e

t
o

O
F
F
L
I
N
E

r
e
v
e
n
u
e
DYN-CR STAT-CR FCFS EMSR
MDP BDYN-CR BSTAT-CR BSTAT-AR
BDYN-AR DYN-AR STAT-AR
Figure 12 Average relative performance of policies in Example-4 when arrivals are time-homogeneous
12), MDP is the optimal policy and it performs remarkably well compared to the oine optimal. EMSR is
only a heuristic in this case. There are three important observations about the robust policies: First, the use
of demand bounds improves the performance signicantly. Second, there is minimal dierence among the
robust policies that use demand information. Third, robust policies that use demand bounds perform as well
as EMSR except in the extreme case where class-2 demand is negligible and class-1 demand exceeds capacity
(which is unrealistic and/or not interesting from a RM perspective). When the arrivals follow the LBH
regime (see Figure 13), EMSR is the optimal policy. Note that the robust policies with demand information
are again indistinguishable from each other and also from EMSR for practical instances. Note that among
the policies that use no demand information, static (dynamic) policies perform better than dynamic (static)
policies when class-2 (class-1) demand is higher than class-1 (class-2) demand. This is a direct consequence
of the dierences in the booking limits of static vs. dynamic policies.
Example-5 (extended). We now report additional results on Example 5 of Section 7. First of all, when
the CoV=0.4, the average of ratio of policy revenues to OFFLINE is 0.86, 0.87, 0.69, and 0.70 for DYN-CR,
STAT-CR, DYN-AR, and STAT-AR, respectively. The benet of demand information is signicant especially
on MAR policies in this example: DYN-AR and STAT-AR achieve the lowest revenues (signicantly lower
than any other policy) in this experiment, while BSTAT-AR and BDYN-AR are as good as DP which provides
the optimal solution. When the CoV increases, and demand is truncated (to eliminate negative demand
Y.Lan, H.Gao, M.Ball, I.Karaesmen: Revenue Management with Limited Demand Information
22 to appear in Management Science; manuscript no. XXX
0.8
0.84
0.88
0.92
0.96
1
[
1
2
0
,
0
]
[
1
1
0
,
1
0
]
[
1
0
0
,
2
0
]
[
9
0
,
3
0
]
[
8
0
,
4
0
]
[
7
0
,
5
0
]
[
6
0
,
6
0
]
[
5
0
,
7
0
]
[
4
0
,
8
0
]
[
3
0
,
9
0
]
[
2
0
,
1
0
0
]
[
1
0
,
1
1
0
]
[
0
,
1
2
0
]
mean demand [
2
,
1
]
a
v
e
r
a
g
e

o
f

r
a
t
i
o

o
f

p
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y

r
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t
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E

r
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n
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e
DYN-CR, STAT-CR FCFS
EMSR BDYN-CR, BSTAT-CR
BSTAT-AR, BDYN-AR DYN-AR, STAT-AR
Figure 13 Average relative performance of policies in Example-4 when arrivals are LBH
values) in the simulations, the relative performance of the policies with respect to OFFLINE decreases, and
MAR policies are not as good as DP. However, among the policies that use demand bounds, BSTAT-AR and
BDYN-AR perform better than BSTAT-CR and BDYN-CR, both of which perform signicantly better than
EMSR-b; see Figure 14. Notice that the x-axis in the gure reports the CoV used in computing the policy
parameters, but this CoV is not valid for the simulated demand since the mean and variance are distorted
when the distribution is truncated. In any case, the results in Figure 14 show the dierences among our
policies and EMSR in a setting where the demand distribution changes.
Example-6 (extended). We present extended results on Example 6 of Section 7 here. We report the
results of our policies with demand information and also their special cases with no demand information. The
average relative performance of the policies as a function of the fare ratio r is given in Figure 15. DYN-CR,
STAT-AR and DYN-AR perform very well in this example. This is not surprising because they protect more
seats for class-1 in general and it pays o in this case. In fact, DYN-AR protects too many and is worse than
STAT-AR. STAT-CR performs relatively poorly especially when r is small (this observation is the same as
in Example-2a and is a factor of the protection level of STAT-CR and the demand for class-1).
Next we test the eect of errors in estimation/specication of parameters of the demand distribution.
Example-7. We have m=2, (f
1
, f
2
) =(500, 100), and the demand is Poisson distributed. The true mean
demand for each fare class is 60 for the entire booking horizon. While the true demand distribution of class-2
Y.Lan, H.Gao, M.Ball, I.Karaesmen: Revenue Management with Limited Demand Information
to appear in Management Science; manuscript no. XXX 23
65%
70%
75%
80%
85%
90%
95%
100%
0.4 0.8 1.2 1.6
coefficient of variation
a
v
e
r
a
g
e

o
f

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o
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p
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t
o

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F
F
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N
E

r
e
v
e
n
u
e
DP FCFS EMSR-B BDYN-AR
BSTAT-AR DYN-CR STAT-CR DYN-AR
BDYN-CR BSTAT-CR STAT-AR
Figure 14 Average relative performance of policies in Example-5 when CoV increases and demand is truncated.
86%
88%
90%
92%
94%
96%
98%
100%
0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1
fare ratio (r=f
2
/f
1
)
a
v
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o
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p
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F
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E

r
e
v
e
n
u
e



DYN-CR STAT-CR BDYN-CR BSTAT-CR
DYN-AR STAT-AR BDYN-AR BSTAT-AR
Figure 15 Average relative performance of policies in Example-6
is known, only an estimate of
1
, the parameter of demand distribution for class-1, is available. All policy
parameters are determined based on the estimates. The arrivals are LBH. The average relative performance
of the policies is presented in Figure 16, where the estimate of mean demand for class-1 varies from 30
to 90. Notice that our policies with demand bounds behave similar to EMSR. They perform relatively
Y.Lan, H.Gao, M.Ball, I.Karaesmen: Revenue Management with Limited Demand Information
24 to appear in Management Science; manuscript no. XXX
76%
78%
80%
82%
84%
86%
88%
90%
92%
94%
96%
98%
100%
30 40 50 60 70 80 90
estimate of
1
a
v
g
.

o
f

r
a
t
i
o

o
f

p
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c
y

r
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n
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t
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F
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N
E

r
e
v
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n
u
e
DYN-CR BDYN-CR FCFS
DYN-AR BSTAT-AR EMSR
Figure 16 Average relative performance of policies in Example-7 when arrivals are LBH.
well given a moderate forecast error (e.g., mean in the range 45 to 75). LBH arrivals amplify the eect
of underestimating high-fare demand. Our policies with demand information perform slightly better than
EMSR when class-1 demand is underestimated or highly overestimated. This is natural because (i) our
policies tend to overprotect seats, hence, the adverse aect of underestimating the demand for class-1 is less,
and (ii) the demand information for our policies is only valuable if the upper bound on demand is no more
than the capacity (i.e., overestimation becomes less detrimental to the performance beyond a certain point).
We repeated this example with time-homogeneous arrivals: the average relative performance of policies is
presented in Figure 17.
Example-8. In this example, the demand and fare parameters are the same as Example-4 above. The
demand is Poisson distributed and demand mix varies from [120,0] to [0,120]. The mean demand for the
entire booking horizon is known. In this experiment, MDP assumes stationary arrivals for the entire booking
horizon, whereas all the demand arrives in a rush only in the rst half of the booking horizon. This unexpected
burst of arrivals hampers the performance of time- and capacity-dependent policy of MDP. As seen in Figure
18, MDP has poor performance when
2
is high and
1
is low because it ends up rejecting too many class-2
requests. In contrast, robust policies and EMSR are not aected by modeling/estimation errors regarding
inter-arrival times. While this example may be an extreme one, it illustrates that a control policy obtained
via MDP is sensitive to time-varying rate of arrivals even though it appears to be robust for misspecations
Y.Lan, H.Gao, M.Ball, I.Karaesmen: Revenue Management with Limited Demand Information
to appear in Management Science; manuscript no. XXX 25
86%
88%
90%
92%
94%
96%
98%
100%
30 40 50 60 70 80 90
estimate of
1
a
v
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o
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t
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r
e
v
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n
u
e
DYN-CR STAT-CR DYN-AR STAT-AR
BDYN-CR BSTAT-CR BDYN-AR BSTAT-AR
EMSR FCFS MDP
Figure 17 Average relative performance of policies in Example-7 when arrivals are time-homogeneous.
84%
86%
88%
90%
92%
94%
96%
98%
100%
[
1
2
0
,
0
]
[
1
1
0
,
1
0
]
[
1
0
0
,
2
0
]
[
9
0
,
3
0
]
[
8
0
,
4
0
]
[
7
0
,
5
0
]
[
6
0
,
6
0
]
[
5
0
,
7
0
]
[
4
0
,
8
0
]
[
3
0
,
9
0
]
[
2
0
,
1
0
0
]
[
1
0
,
1
1
0
]
[
0
,
1
2
0
]
mean demand [
2
,
1
]
a
v
g
.

o
f

r
a
t
i
o

o
f

p
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c
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F
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E

r
e
v
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n
u
e


BSTAT-CR BDYN-AR BSTAT-AR FCFS
EMSR MDP BDYN-CR
Figure 18 Average relative performance of policies in Example-8
of the arrival rate when arrivals are time-stationary.