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Regret in Overbooking and Fare-Class Allocation for Single Leg

Listed author(s):
  • Yingjie Lan


    (Guanghua School of Management, Peking University, Beijing 100871, China)

  • Michael O. Ball


    (Robert H. Smith School of Business, University of Maryland, College Park, Maryland 20742)

  • Itir Z. Karaesmen


    (Kogod School of Business, American University, Washington, DC 20016)

Registered author(s):

    Focusing on a seller's regret in not acting optimally, we develop a model of overbooking and fare-class allocation in the multifare, single-resource problem in revenue management. We derive optimal static overbooking levels and booking limits, in closed form, that minimize the maximum relative regret (i.e., maximize competitive ratio). We prove that the optimal booking limits are nested. Our work addresses a number of important issues. (i) We use partial information, which is critical because of the difficulty in forecasting fare-class demand. Demand and no-shows are characterized using interval uncertainty in our model. (ii) We make joint overbooking and fare-class allocation decisions. (iii) We obtain conservative but practical overbooking levels that improve the service quality without sacrificing profits. Using computational experiments, we benchmark our methods to existing ones and show that our model leads to effective, consistent, and robust decisions.

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    Article provided by INFORMS in its journal Manufacturing & Service Operations Management.

    Volume (Year): 13 (2011)
    Issue (Month): 2 (December)
    Pages: 194-208

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    Handle: RePEc:inm:ormsom:v:13:y:2011:i:2:p:194-208
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    1. Yingjie Lan & Huina Gao & Michael O. Ball & Itir Karaesmen, 2008. "Revenue Management with Limited Demand Information," Management Science, INFORMS, vol. 54(9), pages 1594-1609, September.
    2. Garrett van Ryzin & Jeff McGill, 2000. "Revenue Management Without Forecasting or Optimization: An Adaptive Algorithm for Determining Airline Seat Protection Levels," Management Science, INFORMS, vol. 46(6), pages 760-775, June.
    3. Iliescu, Dan C. & Garrow, Laurie A. & Parker, Roger A., 2008. "A hazard model of US airline passengers' refund and exchange behavior," Transportation Research Part B: Methodological, Elsevier, vol. 42(3), pages 229-242, March.
    4. Varda Liberman & Uri Yechiali, 1978. "On the Hotel Overbooking Problem--An Inventory System with Stochastic Cancellations," Management Science, INFORMS, vol. 24(11), pages 1117-1126, July.
    5. Alstrup, Jens & Boas, Soren & Madsen, Oli B. G. & Vidal, ReneVictor Valqui, 1986. "Booking policy for flights with two types of passengers," European Journal of Operational Research, Elsevier, vol. 27(3), pages 274-288, December.
    6. \c{S}. \.Ilker Birbil & J. B. G. Frenk & Joaquim A. S. Gromicho & Shuzhong Zhang, 2009. "The Role of Robust Optimization in Single-Leg Airline Revenue Management," Management Science, INFORMS, vol. 55(1), pages 148-163, January.
    7. Luo, Sirong & Çakany?ld?r?m, Metin & Kasilingam, Raja G., 2009. "Two-dimensional cargo overbooking models," European Journal of Operational Research, Elsevier, vol. 197(3), pages 862-883, September.
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