Dynamic Revenue Management in Airline Alliances

50 Pages Posted: 18 Mar 2008 Last revised: 15 Apr 2008

See all articles by Christopher P. Wright

Christopher P. Wright

University of Rochester - Simon Business School

Harry Groenevelt

Simon Graduate School of Business, University of Rochester

Robert A. Shumsky

Dartmouth College - Tuck School of Business

Date Written: February 11, 2008

Abstract

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.

Keywords: revenue management, yield management, airlines, Markov game, alliances

JEL Classification: C72, C73, L93

Suggested Citation

Wright, Christopher P. and Groenevelt, Harry and Shumsky, Robert A., Dynamic Revenue Management in Airline Alliances (February 11, 2008). Tuck School of Business Working Paper No. 2008-46, Available at SSRN: https://ssrn.com/abstract=1105135 or http://dx.doi.org/10.2139/ssrn.1105135

Christopher P. Wright

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States

Harry Groenevelt

Simon Graduate School of Business, University of Rochester ( email )

Carol Simon Hall 3-339
Rochester, NY 14627
United States
585-275-2825 (Phone)
585-275-9331 (Fax)

Robert A. Shumsky (Contact Author)

Dartmouth College - Tuck School of Business ( email )

Hanover, NH 03755
United States

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