Airline revenue management with segmented continuous pricing: methods and competitive effects
Name
41272_2023_Article_462.pdf
Size
1.39 MB
Format
Adobe PDF
Checksum (MD5)
16ee2ce7a5ef2c136d1e33f6ea452c79
Author(s)
Long, Yanbin
Belobaba, Peter
Date Issued
December 3, 2023
Publisher
Palgrave Macmillan UK
Citation
Long, Yanbin and Belobaba, Peter. 2023. "Airline revenue management with segmented continuous pricing: methods and competitive effects."
Version
Final published version
Abstract
With the introduction of IATA’s New Distribution Capability (NDC), airlines will no longer be limited to discrete fare classes for their fare product distribution but could show fare quotes from continuous ranges to booking requests. NDC will also allow airlines to present different fare quotes to passengers from different demand segments as identified by the airline. In theory, airlines can better extract passenger willingness to pay, and thus, see gains in revenue, by offering segmented continuous fare quotes to different passengers requesting to book. This paper describes the revenue management (RM) methods for Segmented Continuous Pricing and examines their potential effects on airlines’ revenue through simulations in the Passenger Origin–Destination Simulator (PODS). We describe a class-based algorithm for continuous pricing, a straightforward extension from the traditional methods used with existing RM systems. Our simulation results show that in a calibrated scenario in which only one airline adopts Segmented Continuous Pricing and has an 80% accuracy in identifying business versus leisure passenger booking requests, the first-mover airline can see as much as a 17% revenue gain, at the expense of competitors. The revenue gains come primarily from the leisure passenger segment by offering lower fares than competitors closer to departure. The first-mover airline loses bookings but does not see losses in revenue from the business passenger segment. We also explore potential response strategies by the competing airlines. We discover that competitors can reverse the first-mover’s revenue gain by removing their fare restrictions while still using traditional RM methods. We conclude that although adopting Segmented Continuous Pricing is promising in theory, its gains in practice will depend heavily on the competitive situation and the responses made by competing airlines.
MIT Department
Massachusetts Institute of Technology. Department of Aeronautics and Astronautics
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Creative Commons Attribution
Persistent DSpace Link
DOI of Published Version
https://doi.org/10.1057/s41272-023-00462-6
