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Pricing perishable inventories by using marketing restrictions with applications to airlines

University of British Columbia

This thesis addresses the problem of pricing perishable inventories such as airline seats and hotel rooms. It also analyzes the airline seat allocation problem when two airlines compete on a single-leg flight. Finally, several existing models for seat allocation with multiple fares on a single-leg flight are compared. The pricing framework is consistent with modern yield management tools which utilize restrictions such as weekend stayover to segment the market. One model analyzed considers a restriction which is irrelevant to one set of consumers, but which the others find so onerous that they will not purchase a restricted ticket at any price. If the consumers who do not mind the restriction are less price sensitive than those who find the restriction onerous, then the thesis shows that there is an optimal policy for a monopolist which will sell fares at no more than three price levels. When two restrictions are allowed in the model, if one is more onerous than the other in the sense that the set of consumers who would not buy a ticket with the first restriction is a subset of those who would not buy it with the second restriction, then the restrictions are said to be nested. If the sets of consumers who would not buy tickets with the first restriction is disjoint from those who would not buy with the second restriction, then the restrictions are said to be mutually exclusive. If two restrictions are either nested or mutually exclusive, then a monopolist needs at most four price levels with three types (i.e. combinations of restrictions) of product. With two general restrictions, the monopolist may need five price levels with four types of product. The pricing model is applied to restrictions which are based on membership in a particular organization. For example, employees of an airline are frequently eligible for special fares. Some airlines provide special fares for government employees or for employees of certain corporations. An analysis is given to help airlines understand the costs and benefits of such arrangements. A model of two airlines competing on a single-leg flight is developed for the case where the airlines have fixed capacity and fixed price levels for two types of fares-full and discount. The airlines compete by controlling the number of discount fares which they sell. The split of the market between the airlines is modelled in two different ways. First, the airlines might share the market for a fare class proportionally to their allocation of seats to that fare class. In this case, under certain conditions, there exists an equilibrium pair of booking limits for the discount fare such that each airline will protect the same number of seats for the full fare customers, even when the demands are random and stochastically dependent. The second market sharing model assumes that the two airlines share the market demand equally. In this case, when the demands are deterministic, then there is an equilibrium solution where each airline will protect enough seats to split equally the market for the full fares. Finally, three existing seat allocation models for multi-fare single-leg flights with stochastically independent demands are compared. It is shown that the optimality conditions for each of these models are analytically equivalent, thus providing a unified approach to this problem.

Thesis/Dissertation

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2009-04-08

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http://hdl.handle.net/2429/6889

Business Administration

University of British Columbia

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