A Discrete Choice Model of Yield Management
UPF Economics and Business Working Paper No. 533
20 Pages Posted: 29 Jun 2001
Customer choice behavior, such as "buy-up" and "buy-down", is an important phenomenon in a wide range of industries. Yet there are few models or methodologies available to exploit this phenomenon within yield management systems. We make some progress on filling this void. Specifically, we develop a model of yield management in which the buyers' behavior is modeled explicitly using a multi-nomial logit model of demand. The control problem is to decide which subset of fare classes to offer at each point in time. We formulate a dynamic program to determine the optimal control policy and show that it reduces to a dynamic nested allocation policy.
Keywords: Yield management, revenue management, discrete choice theory, airlines, dynamic programming
JEL Classification: C13, C14
Suggested Citation: Suggested Citation