Dynamic Programming for Optimal Delivery Time Slot Pricing

D. Lebedev, P. J. Goulart and K. Margellos

European Journal of Operational Research, 2020. To appear.
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@article{LGM:2020c,
  author = {D. Lebedev and P. J. Goulart and K. Margellos},
  title = {Dynamic Programming for Optimal Delivery Time Slot Pricing},
  journal = {European Journal of Operational Research},
  year = {2020},
  note = {To appear},
  url = {https://doi.org/10.1016/j.ejor.2020.11.010},
  doi = {10.1016/j.ejor.2020.11.010}
}

We study the dynamic programming approach to revenue management in the context of attended home delivery. We draw on results from dynamic programming theory for Markov decision problems to show that the underlying Bellman operator has a unique fixed point. We then provide a closed-form expression for the resulting fixed point and show that it admits a natural interpretation. Moreover, we also show that – under certain technical assumptions – the value function, which has a discrete domain and a continuous codomain, admits a continuous extension, which is a finite-valued, concave function of its state variables, at every time step. This result opens the road for achieving scalable implementations of the proposed formulation in future work, as it allows making informed choices of basis functions in an approximate dynamic programming context. We illustrate our findings on a simple numerical example and provide suggestions on how our results can be exploited to obtain closer approximations of the exact value function.