Revenue Management with Partially Refundable Fares
38 Pages Posted: 22 Sep 2009
Date Written: November 21, 2008
We introduce and analyze an inter-temporal choice model where customer valuations are uncertain and evolve over time. The model leads directly to the study of call options on capacity that are similar to partially refundable fares. We show that the capacity provider earns significantly higher revenues by selling real options on capacity than low-to-high pricing. We also investigate the social implications and show that the use of options is both socially optimal and socially efficient.
Keywords: partial refunds, advance purchases, uncertain valuations, revenue management, real options
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