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Models of the Spiral-Down Effect in Revenue Management

Author

Listed:
  • William L. Cooper

    (Department of Mechanical Engineering, University of Minnesota, Minneapolis, Minnesota 55455)

  • Tito Homem-de-Mello

    (Department of Industrial Engineering and Management Sciences, Northwestern University, Evanston, Illinois 60208)

  • Anton J. Kleywegt

    (School of Industrial and Systems Engineering, Georgia Institute of Technology, Atlanta, Georgia 30332-0205)

Abstract

The spiral-down effect occurs when incorrect assumptions about customer behavior cause high-fare ticket sales, protection levels, and revenues to systematically decrease over time. If an airline decides how many seats to protect for sale at a high fare based on past high-fare sales, while neglecting to account for the fact that availability of low-fare tickets will reduce high-fare sales, then high-fare sales will decrease, resulting in lower future estimates of high-fare demand. This subsequently yields lower protection levels for high-fare tickets, greater availability of low-fare tickets, and even lower high-fare ticket sales. The pattern continues, resulting in a so-called spiral down. We develop a mathematical framework to analyze the process by which airlines forecast demand and optimize booking controls over a sequence of flights. Within the framework, we give conditions under which spiral down occurs.

Suggested Citation

  • William L. Cooper & Tito Homem-de-Mello & Anton J. Kleywegt, 2006. "Models of the Spiral-Down Effect in Revenue Management," Operations Research, INFORMS, vol. 54(5), pages 968-987, October.
    • Handle: RePEc:inm:oropre:v:54:y:2006:i:5:p:968-987
    DOI: 10.1287/opre.1060.0304
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    References listed on IDEAS

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