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Regret in Overbooking and Fare-Class Allocation for Single Leg

Author

Listed:
  • 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)

Abstract

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.

Suggested Citation

  • Yingjie Lan & Michael O. Ball & Itir Z. Karaesmen, 2011. "Regret in Overbooking and Fare-Class Allocation for Single Leg," Manufacturing & Service Operations Management, INFORMS, vol. 13(2), pages 194-208, December.
  • Handle: RePEc:inm:ormsom:v:13:y:2011:i:2:p:194-208
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    File URL: http://dx.doi.org/10.1287/msom.1100.0316
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    References listed on IDEAS

    as
    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. 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.
    4. 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.
    5. 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.
    6. 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.
    7. 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.
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    Citations

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    Cited by:

    1. Lan, Yingjie & Ball, Michael O. & Karaesmen, Itir Z. & Zhang, Jean X. & Liu, Gloria X., 2015. "Analysis of seat allocation and overbooking decisions with hybrid information," European Journal of Operational Research, Elsevier, vol. 240(2), pages 493-504.
    2. Guo, Xiaolong & Dong, Yufeng & Ling, Liuyi, 2016. "Customer perspective on overbooking: The failure of customers to enjoy their reserved services, accidental or intended?," Journal of Air Transport Management, Elsevier, vol. 53(C), pages 65-72.
    3. Wang, Xiaojia & Fung, Richard Y.K., 2014. "An option-based hedging mechanism for managing the risk of overbooking in parallel airline alliances," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 70(C), pages 146-162.
    4. Andersson, Jonas & Jörnsten, Kurt & Nonås, Sigrid Lise & Sandal, Leif & Ubøe, Jan, 2013. "A maximum entropy approach to the newsvendor problem with partial information," European Journal of Operational Research, Elsevier, vol. 228(1), pages 190-200.
    5. Ayvaz-Cavdaroglu, Nur & Kachani, Soulaymane & Maglaras, Costis, 2016. "Revenue management with minimax regret negotiations," Omega, Elsevier, vol. 63(C), pages 12-22.
    6. repec:eee:ejores:v:263:y:2017:i:2:p:337-348 is not listed on IDEAS

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