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Revenue management games with government mandate

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  • Zhu, Chenbo
  • Hu, JianQiang

Abstract

In 2007, the Chinese aviation authority asked the five airlines that offer service between Shanghai and Beijing to form an express shuttle alliance so that tickets from one airline could be used for any flight offered by any of the other airlines. In this paper, we study the impact of such a government mandate on the competitiveness of the market and on airline operations. First we extend a competitive airline seat allocation model to include such a government mandate and provide sufficient conditions for the existence of a pure-strategy Nash equilibrium in such a model. Both our analytical and numerical results show that fewer low-fare seats would be made available in a market with the government mandate, and furthermore, revenues of individual airlines would be lower as well. We then study a seat inventory and price competition game between duopoly airlines with the government mandate and establish the existence of pure-strategy Nash equilibriums. We show that with the government mandate, the airlines would reserve more high-fare seats and raise the prices of high-fare seats. In addition, we show that the revenues of the airlines would decrease as fewer low-fare seats are offered and increase as the prices of high-fare seats are increased. We also discuss how the government mandate should be designed so that the market could operate as efficiently as possible.

Suggested Citation

  • Zhu, Chenbo & Hu, JianQiang, 2020. "Revenue management games with government mandate," Omega, Elsevier, vol. 93(C).
    • Handle: RePEc:eee:jomega:v:93:y:2020:i:c:s0305048317306643
    DOI: 10.1016/j.omega.2019.08.010
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