The Stochastic Knapsack Revisited: Switch-Over Policies and Dynamic Pricing

The stochastic knapsack has been used as a model in wide-ranging applications from dynamic resource allocation to admission control in telecommunication. In recent years, a variation of the model has become a basic tool in studying problems that arise in revenue management and dynamic/flexible pricing, and it is in this context that our study is undertaken. Based on a dynamic programming formulation and associated properties of the value function, we study in this paper a class of control that we call switch-over policies—start by accepting only orders of the highest price, and switch to including lower prices as time goes by, with the switch-over times optimally decided via convex programming. We establish the asymptotic optimality of the switch-over policy, and develop pricing models based on this policy to optimize the price reductions over the decision horizon.