Airline Revenue Management and e-Markets Outline.pdf

1Airline Revenue Management and e-Markets Garrett van Ryzin Columbia University Outline Overview and basic economics Revenue management models methodology Auctions and alternative price mechanisms Research challenges 2The airline economic environment ? Demand Side – Heterogeneity in customers ? Product sensitivity: – schedule flexibility – cancellation options – service/brand ? Price sensitivity ? Purchase Behavior – Demand variability ? Aggregate variability ? Individual uncertainty ? Supply Side – Low marginal costs – Capacity constraints – “Lumpy” capacity – Network effects ? Competitive markets Revenue management components Product Design Pricing Capacity Allocation - Purchase restrictions - Cancellation options - Channel of distribution - O-D market level - Quasi-static (rigid) - Set ex ante - Departure level - Tactical, real-time - ex post rationing 3Goal: Maximize revenues from a fixed set of capacities 2 Flights Capacity = 3 seats $800 $700 $400 $300 $100 Example 5 customers with different valuations (unobservable) 8:00 AM 1:00 PM 4Best single price: $700 Revenue: 2 x $700 = $1400 Maximum obtainable revenue $800 + $700 + $400 + $300 +$ 200 = $2400 58% of maximum achieved $700 $400 $800 $300 $200 priced out $700 $700 Discrimination via a “sorting mechanism” $800 $700 $400 $300 $200 Customers returning by Saturday Customers staying a Saturday A trait that is correlated with willingness to pay allows for discrimination - Saturday night stay - Advance purchase req. - Distribution channel (e.g. internet) 5Price discrimination: SA stay: $400 No SA stay: $700 Revenue: 2 x $700 + 1 x $400 = $1800 Maximum revenue $2400 75% of maximum achieved $700 $400 $800 $300 $200 priced out $700 $400 $700 $400 $400 $700 $800 $300 $200 $700 $400 $200 8:00 AM 1:00 PM $700 $400 $200X 0 seats available Reveune = 2 x $700 + 1 x $400 + 2 x $200 = $2200 2 seats available 92% of maximum Introduce capacity-controlled discount 6What is the economics at work here? Mo