Managing Flexible Products on a Network

Abstract

A flexible product is a menu of two or more alternatives products serving the same market. Purchasers of flexible products are assigned to one of the alternatives at a later date. Gallego and Phillips show that capacitated suppliers, such as airlines and hotels, can potentially improve revenue by offering flexible products in addition to traditional specific products. In this paper, we extend the concept of flexible products to networks. We study the network revenue management problem with flexible products in two different settings: one where the demand for each product is independently and exogenously generated; and the other where the demand is driven by a consumer choice model. We show that in both these settings the optimal value of the stochastic optimization problem can be closely approximated by the optimal value of a deterministic linear program. In the independent demand case the corresponding linear program is of modest size. When the demand is driven by a customer choice model, the linear program has exponentially many variables; however, we show that for an important class of consumer choice models the linear program can be efficiently solved using column-generation. We report the findings of numerical experiments with a real airline subnetwork and show how the results vary as a function of the key inputs.

Keywords: Flexible products, network revenue management

JEL Classification: M11