Authors: Syed Asif Raza
Differentiated pricing is among the widely practised Revenue Management (RM) tactics in which a firm offers its products/services at differentiated prices to distinct markets. This strategy has also been noticed in airline RM for more than four decades. Earlier researches have shown that the benefits from differentiated pricing are evident when the market segmentation is assumed perfect which are regarded as distinct markets with deterministic demands.
In perfect market segmentation customers associated with a market segment do not cannibalize (move) between market segments. However, it is not uncommon to notice that the market segmentation is seldom prefect regardless of the type of industry besides demand behavior is often uncertain. Due to this, in airline industry the passengers are expected to cannibalize between fare classes referred as demand leakage.
This research addresses the issue of establishing an integrated framework to optimize fare price differentiation strategy, fare pricing, and seat inventory control for an airline that experiences the demand leakage. Models are proposed for an airline that experiences deterministic demand, stochastic demand, in the situation when the distribution of the price dependent stochastic demand is unknown.