Purpose This paper studies the revenue management problem for reusable products with breakdowns. In the rental industry, returned products are used by other new customers. So, these products are called reusable products. This paper considers returns with breakdowns. To deal with the computational complexity of the dynamic programming model, this paper develops an efficient heuristic.
Methods A dynamic programming (DP) model is formulated for the optimal revenue management. For the computational complexity, the value functions of the DP model are linearly approximated. The linear approximation method has the theoretical performance guarantee of the half of the optimal total expected revenue.
Results The computational time of the DP model increases significantly as the initial capacity increases. In the numerical study, the performance of the heuristic is substantially better than the theoretical guarantee. In addition, the heuristic produces a better solution in less computational time than the baseline approach.
Conclusion Therefore, a firm with a large initial capacity is recommended to use the proposed heuristic.