| Differentiated fare pricing is among widely practiced Revenue Management (RM) tactics in which an airline segments its demand into distinct fare classes. This strategy has been successfully implemented in airline industry for more than four decades. Earlier researches have shown that the benefits from differentiated pricing are evident for perfect market segmentation in which there is no leakage of the demand between the market segments. However, it is not uncommon to notice that the market segmentation is seldom prefect and regardless of a fencing strategy, demand leakage is often experienced. Thus, in realistic situation, demand behavior is expected to be uncertain and there will a demand leakage which will cannibalize demand from one market segment to another. This research addresses the issue of establishing an integrated framework to optimize the fare pricing, and seat inventory control for an airline that experiences the demand leakage in its fare classes. Models are proposed for an airline that experiences deterministic demand, stochastic demand, and stochastic demand whose distribution is unknown. These models are analyzed numerically to outline an integrated optimal control framework for fare pricing, seat inventory control decisions for an airline. Numerical experimentation show that the proposed integrated framework significantly improves the revenue gains to an airline, however, demand leakage between fare classes can substantially undermine the profitability of an airline. |
Updated 07/09/2013