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Revenue Management with Partially Refundable Fares

Author

Listed:
  • Guillermo Gallego

    (Department of Industrial Engineering and Operations Research, Columbia University, New York, New York 10027)

  • Özge Şahin

    (Stephen M. Ross School of Business, University of Michigan, Ann Arbor, Michigan 48109)

Abstract

We introduce and analyze an intertemporal choice model where customer valuations are uncertain and evolve over time. The model leads directly to the study of call options on capacity that are similar to partially refundable fares. We show that the capacity provider earns significantly higher revenues by selling real options on capacity than on low-to-high pricing. We also investigate the social implications and show that the use of options is both socially optimal and socially efficient.

Suggested Citation

  • Guillermo Gallego & Özge Şahin, 2010. "Revenue Management with Partially Refundable Fares," Operations Research, INFORMS, vol. 58(4-part-1), pages 817-833, August.
    • Handle: RePEc:inm:oropre:v:58:y:2010:i:4-part-1:p:817-833
    DOI: 10.1287/opre.1090.0769
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    References listed on IDEAS

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