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Pricing and capacity rationing in rentals

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The authors consider a rental firm with two types of customers. Contract customers pay fixed, pre-negotiated rental fees and expect a high quality of service. Walk-in customers have no contractual relations with the firm and are "shopping" for price. Given multiple contract and walk-in classes, the rental firm has to decide when to offer service to contract customers and what fees to charge walk-in customers for service. They formulate this rental management problem as a problem in stochastic control and characterize optimal policies for managing contract and walk-in customers. They also consider static, myopic controls that are simpler to implement, and they analytically establish conditions under which these policies perform optimally. Complementary numerical tests provide a sense of the range of systems for which myopic policies are effective.

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