Revenue Management with Partially Refundable Fares

38 Pages Posted: 22 Sep 2009

See all articles by Guillermo Gallego

Guillermo Gallego

Columbia University

Ozge Sahin

Johns Hopkins University - Carey Business School

Date Written: November 21, 2008

Abstract

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

Suggested Citation

Gallego, Guillermo and Sahin, Ozge, Revenue Management with Partially Refundable Fares (November 21, 2008). Available at SSRN: https://ssrn.com/abstract=1476313 or http://dx.doi.org/10.2139/ssrn.1476313

Guillermo Gallego

Columbia University ( email )

3022 Broadway
New York, NY 10027
United States

Ozge Sahin (Contact Author)

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

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