Firm-Centric and Customer-Centric Flexiblity Products

Abstract

Problem Definition: This paper examines the profitability of two flexibility products: firm-centric flexibility products, where the firm takes advantage of the flexibility, and customer-centric flexibility products, where the customer takes advantage of the flexibility. Methodology/Results: Using analytical and numerical methods, we investigate the potential benefits of combining both firm-centric and customer-centric flexibility products in an integrated flexibility model. The analysis reveals a synergistic effect, wherein the integrated model generates greater overall profit for the firm compared to the sum of individual revenue increases from the separate models. Special cases are analyzed where airlines exclusively offer one type of flexibility product alongside their standard offering. In the firm-centric flexibility model, a threshold structure is observed, where the optimal policy satisfies initial demand from low-paying firm-centric flexibility customers up to a certain threshold. This finding holds true even in the integrated model. For the customer-centric flexibility model, optimal strategies involve either refraining from selling customer-centric products or offering them in large quantities to manage mismatch penalty costs effectively. Managerial Implications: By strategically integrating firm-centric and customer-centric flexibility offerings, airlines can enhance revenue management strategies, optimize seat capacity management, and tap into additional revenue streams. This research provides insight into improving revenue management, adapting to evolving customer preferences, and making informed decisions.

Keywords: Flexible products, Firm-centric flexibility, Customer-centric flexibility, Revenue management