Integrating Price Volatility into Revenue Management: Exploring the Tradeoff between Price Fluctuations and Strategic Consumers

Abstract

Price fluctuations largely influence consumers’ purchasing behavior in two opposite directions: they affect price sensitivity and the acceptable price ranges, while favoring consumers to exhibit strategic behavior by waiting for prices to come back down. Firms selling revenue-managed goods can exploit this tradeoff to efficiently implement revenue management practices. We illustrate how to incorporate price volatility into the classic Expected Marginal Seat Revenue model. Our results reveal that, in certain market conditions, such integration could result in a significant increase in revenue. We further provide guidance to support pricing decisions when faced with the price sensitivity—strategic consumers tradeoff. © The Author(s), under exclusive licence to Springer Nature Limited 2024.

Keywords: EMSR, Price sensitivity, Price volatility, Pricing strategies