Airline Revenue Management Under Imperfect Market Segmentation
26 Pages Posted: 30 Jan 2008
Date Written: 2003
We study the dynamic seat inventory control problem for a single-leg flight with multiple fare classes under imperfect market segmentation, when customers book the lowest available class whose restrictions they can meet and whose fare they are willing to pay. This is more realistic than the usual assumption that each customer requests a particular fare class, and is lost when it is not available. We derive theoretical properties of the value functions and optimal policy for a generic single-resource revenue management problem, of which this problem is a special case. In particular, we show that a nested policy is not necessarily optimal when a fare class is underpriced or not sufficiently restricted. Numerical examples show that incorporating imperfections of the market segmentation in the booking policy leads to significant revenue gains.
Keywords: revenue management, market segmentation, sell-up, inventory control, dynamic pricing
JEL Classification: C61
Suggested Citation: Suggested Citation