Pricing and Revenue Optimization

Pricing and Revenue Optimization

Pricing and Revenue Optimization

Pricing and Revenue Optimization


This is the first comprehensive introduction to the concepts, theories, and applications of pricing and revenue optimization. From the initial success of "yield management" in the commercial airline industry down to more recent successes of markdown management and dynamic pricing, the application of mathematical analysis to optimize pricing has become increasingly important across many different industries. But, since pricing and revenue optimization has involved the use of sophisticated mathematical techniques, the topic has remained largely inaccessible to students and the typical manager.

With methods proven in the MBA courses taught by the author at Columbia and Stanford Business Schools, this book presents the basic concepts of pricing and revenue optimization in a form accessible to MBA students, MS students, and advanced undergraduates. In addition, managers will find the practical approach to the issue of pricing and revene optimization invaluable.


This book grew out of courses in pricing and revenue optimization developed at Columbia University and Stanford University. At the time there were few other comparable courses. Since then, it has become clear that there is growing interest in pricing and revenue optimization (a.k.a. revenue management and dynamic pricing) as a topic of study within both business schools and management science/operations research departments. This interest is quite understandable: Not only is pricing and revenue optimization an important applications arena for quantitative analysis, it has achieved widely publicized successes in many industries, and there is growing interest in the techniques of pricing and revenue optimization across many different industries. Some of the issues involved in developing and teaching an MBA course in pricing and revenue optimization have been treated in articles by Peter Bell (2004) and myself (Phillips 2004).

The primary audience for this book is students at the MBA, masters, or undergraduate level. The book assumes some familiarity with probabilistic modeling and optimization theory and comfort with basic calculus. Sections that require somewhat more quantitative sophistication (or at least more patience) have been marked with an asterisk (*) and can be skipped without loss of continuity. In pricing and revenue optimization, as in other applications of management science, what is theoretically elegant is often not practical and what is practical is usually not theoretically elegant. When in doubt, I have erred on the side of presenting the practical. For those who would like to dive deeper into the theory, I would recommend Talluri and van Ryzins The Theory and Practice of Revenue Management (2004).

Among those who read drafts of this book and generously provided comments and suggestions, pride of place belongs to Michael Harrison, who cotaught the pricing and revenue optimization course with me at the Stanford Business School. Not only did Mike read the first draft and provide many helpful comments, but our discussions helped me focus my own thinking. I am also thankful to Brenda Barnes, whose careful reading and thoughtful comments on several chapters resulted in substantial improvements. The late Ken McLeod of Stanford University Press provided encouragement and inspiration in the early days of writing the book. He is very much missed. I would also like to thank Dean Boyd, Bill Carroll, Yosun Denizeri, Michael Eldredge, Mehran Farahmand, Scott Friend, Steve Haas, Jake . . .

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