Dynamic Revenue Management in Airline Alliances
Christopher P. Wright
University of Rochester - Simon School of Business
Simon Graduate School of Business, University of Rochester
Robert A. Shumsky
Dartmouth College - Tuck School of Business
February 11, 2008
Tuck School of Business Working Paper No. 2008-46
Major airlines are selling increasing numbers of interline itineraries, in which flights operated by two or more airlines are combined and sold together. One reason for this increase is the rapid growth of airline alliances, which promote the purchase of interline itineraries and therefore virtually extend the reach of each alliance member's network. This practice, however, creates a difficult coordination problem: each member of the alliance makes revenue management decisions to maximize its own revenue, and the resulting behavior may produce sub-optimal revenue for the alliance as a whole. Airline industry researchers and consultants have proposed a variety of static and dynamic mechanisms to control revenue management decisions across alliances (a dynamic mechanism adjusts its parameters as the number of available seats in the network changes). In this paper, we formulate a Markov-game model of a two-partner alliance that can be used to analyze the effects of these mechanisms on each partner's behavior. We begin by showing that no Markovian transfer pricing mechanism can coordinate an arbitrary alliance. Next, we examine three dynamic schemes, as well three forms of the static scheme widely used in practice. We derive the equilibrium acceptance policies under each scheme and use analytical techniques, as well as numerical analyses of sample alliances, to generate fundamental insights about partner behavior under each scheme. The analysis and numerical examples also illustrate how certain transfer price schemes are likely to perform in networks with particular characteristics.
Number of Pages in PDF File: 50
Keywords: revenue management, yield management, airlines, Markov game, alliances
JEL Classification: C72, C73, L93working papers series
Date posted: March 18, 2008 ; Last revised: April 15, 2008
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