The Shape of Uncertainty in Revenue Management.

Pearson, Mike

Abstract

The revenue management problem we address is traditionally posed by the budget airlines. These airlines do not tend to have protected classes but instead use dynamic pricing to determine allocation policy. This usually means that passengers who book early get discounted rates, while those booking closer to the date of the flight pay higher rates. We expand on earlier work with the newsvendor problem to employ a network equilibrium solution which takes account of both customer and airline objectives to formulate a dynamic solution to the pricing and allocation of airline tickets in an uncertain demand and supply market. We make use of phase diagram analysis when identifying performance during two stages of the pricing strategy consistent with the airline demand and pricing information. One phase diagram (endogenous) identifies efficient frontiers jointly associated with customer satisfaction and airline performance. The other (exogenous) identifies optimal performance with regard to the global market place. The optimal solution strategy is achieved by a stochastic differential equation set with price and booking closure as control variables. The solution is illustrated with data from the airline industry. The interaction between goodwill costs and the price elasticity of demand for varying levels of forecasting accuracy shows that contribution to profit benefits from i) the incorporation of goodwill costs ii) low levels of elasticity for good forecasting iii) high levels of elasticity for poor forecasting. We identify a breakeven level of forecasting stability which establishes an equilibrium between lean and agile practice.

Citation

Pearson, M. The Shape of Uncertainty in Revenue Management

• Working Paper Type: Working Paper
• Deposit Date: Feb 2, 2015
• Peer Reviewed: Not Peer Reviewed
• Keywords: Revenue Management; Dynamic Pricing; Airline Booking; Stochastic Scheduling; Customer Goodwill
• Public URL: http://researchrepository.napier.ac.uk/id/eprint/7528
• Contract Date: Feb 2, 2015