Revenue management under general discrete choice model of consumer behavior
AbstractCustomer choice behavior, such as 'buy-up' and 'buy-down', is an important phe-nomenon in a wide range of industries. Yet there are few models or methodologies available to exploit this phenomenon within yield management systems. We make some progress on filling this void. Specifically, we develop a model of yield management in which the buyers' behavior is modeled explicitly using a multi-nomial logit model of demand. The control problem is to decide which subset of fare classes to offer at each point in time. The set of open fare classes then affects the purchase probabilities for each class. We formulate a dynamic program to determine the optimal control policy and show that it reduces to a dynamic nested allocation policy. Thus, the optimal choice-based policy can easily be implemented in reservation systems that use nested allocation controls. We also develop an estimation procedure for our model based on the expectation-maximization (EM) method that jointly estimates arrival rates and choice model parameters when no-purchase outcomes are unobservable. Numerical results show that this combined optimization -estimation approach may significantly improve revenue performance relative to traditional leg-based models that do not account for choice behavior.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 533.
Date of creation: Sep 2000
Date of revision: Oct 2001
Contact details of provider:
Web page: http://www.econ.upf.edu/
yield management; revenue management; discrete choice theory; airlines; dynamic programming;
Find related papers by JEL classification:
- C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
- C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Kalyan Talluri & Garrett van Ryzin, 1998. "An Analysis of Bid-Price Controls for Network Revenue Management," Management Science, INFORMS, vol. 44(11-Part-1), pages 1577-1593, November.
- Guillermo Gallego & Garrett van Ryzin, 1994. "Optimal Dynamic Pricing of Inventories with Stochastic Demand over Finite Horizons," Management Science, INFORMS, vol. 40(8), pages 999-1020, August.
- Dror, Moshe & Trudeau, Pierre & Ladany, Shaul P., 1988. "Network models for seat allocation on flights," Transportation Research Part B: Methodological, Elsevier, vol. 22(4), pages 239-250, August.
- Kalyan Talluri, 2003. "On equilibria in duopolies with finite strategy spaces," Economics Working Papers 701, Department of Economics and Business, Universitat Pompeu Fabra.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.