Competition and demand volatility often cause modern enterprises to be confronted by uncertain environments. When a firm manages revenue in such competitive and risky environments. the optimization of pricing and capacity allocation. subject to a fixed time and capacity, becomes a complicated problem. Many previous papers concerning revenue management (RM) and pricing require that the firm possesses the ability to know the demand curve (or demand distribution) and set prices on it to maximize profits. However, this assumption may not be the case in some industries. Therefore, this paper focuses oil the dynamic lead indicators rather than assumptive lag indicators to establish a concise and flexible decision model for practical use. This paper provides an integrated real options (IRO) approach with analytic hierarchy process (AHP) for the auction RM problem under competitive/dynamic pricing and revenue uncertainty in Internet retailing. A numerical example is also presented to illustrate that the IRO approach call generate better decisions than the naive (or risk unawareness) approach ill revenue quality of safety and profitability. The new perspective and approach proposed by this paper can he extended to other RM fields whenever both profitability and risk are critical to decision making. (c) 2007 Elsevier Ltd. All rights reserved.
