Dynamic Pricing and Timing of Upgrades

93 Pages Posted: 20 Oct 2017 Last revised: 14 Jul 2019

See all articles by M. Çakanyıldırım

M. Çakanyıldırım

University of Texas at Dallas - Naveen Jindal School of Management

Özalp Özer

Jindal School of Management - The University of Texas at Dallas

Xiao Zhang

Saint Louis University - Richard A. Chaifetz School of Business; University of Texas at Dallas - Naveen Jindal School of Management

Date Written: October 16, 2017

Abstract

Upgrading is a travel industry practice used to mitigate supply-demand mismatches among products of different quality levels. Such upgrades are usually implemented either at the booking time or at the check-in time. In this paper, we consider dynamically-offered upgrades between the booking and the check-in times by a firm that sells two types of products (premium and regular). The firm decides on the timing and quantity of upgrades. Customers who purchased the regular product may be offered upgrades via notifications containing a link to an upgrade website. A regular product purchaser either accepts or rejects the upgrade offer after clicking the link and observing the upgrade fee (price) dynamically determined by the firm. The upgrades are time limited; when they are not profitable, the firm can stop them by deactivating the upgrade links. Formulating the firm’s revenue maximization problem as a dynamic program, we show that the optimal upgrade policy is of a pulsing type. The firm either maintains zero or the maximum number of upgrade links. We identify a condition under which both the optimal number of active links and the optimal upgrade fee are monotone with respect to the leftover capacities. We then propose and analyze four model variations to incorporate relevant business rules and customer behaviors. The first one has a restricted upgrade fee choice set. The second one has limited upgrade activation and deactivation (e.g., the firm activates and deactivates upgrade links only in the morning of a day, but adjusts upgrade fees dynamically throughout the day). The third one allows a stockout upward substitution, in which the firm can sell a premium product to an arriving regular customer at a discount if the regular product stocks out. The fourth one incorporates consumer choice behaviors. Through a systematic numerical study, we first quantify the revenue improvement from the industry-standard check-in upgrade to dynamic pricing and timing of upgrades. We then identify business contexts, in which the revenue improvement is significant. Finally, we examine the robustness of the optimal dynamic upgrade policy.

Keywords: Upgrades; Demand Shaping; Revenue Management; Pulsing Solutions; Modularity Properties

Suggested Citation

Cakanyildirim, Metin and Özer, Özalp and Zhang, Xiao, Dynamic Pricing and Timing of Upgrades (October 16, 2017). Available at SSRN: https://ssrn.com/abstract=3056060 or http://dx.doi.org/10.2139/ssrn.3056060

Metin Cakanyildirim

University of Texas at Dallas - Naveen Jindal School of Management ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States

Özalp Özer (Contact Author)

Jindal School of Management - The University of Texas at Dallas ( email )

Jindal School of Management
800 W. Campbell Road
Richardson, TX 75080
United States

Xiao Zhang

Saint Louis University - Richard A. Chaifetz School of Business ( email )

3674 Lindell Blvd
St. Louis, MO 63108-3397
United States
314-977-7545 (Phone)

University of Texas at Dallas - Naveen Jindal School of Management ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States

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