Delayed Purchase Options in Single-Leg Revenue Management

Nurşen Aydın (), Ş. İlker Birbil () and Hüseyin Topaloğlu ()
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Nurşen Aydın: Faculty of Engineering and Natural Sciences, Sabancı University, Orhanlı-Tuzla, 34956 Istanbul, Turkey
Ş. İlker Birbil: Faculty of Engineering and Natural Sciences, Sabancı University, Orhanlı-Tuzla, 34956 Istanbul, Turkey
Hüseyin Topaloğlu: School of Operations Research and Information Engineering, Cornell University, Ithaca, New York 14853

Transportation Science, 2017, vol. 51, issue 4, 1031-1045

Abstract: Many airline reservation systems offer the commitment option to their potential passengers. This option allows passengers to reserve a seat for a fixed duration before making a final purchase decision. In this study, we develop single-leg revenue management models that consider such contingent commitment decisions. We start with a dynamic programming model of this problem. This model is computationally intractable as it requires storing a multidimensional state space because of bookkeeping of the committed seats. To alleviate this difficulty, we propose an alternate dynamic programming formulation that uses an approximate model of how the contingent commitments behave and we show how to extract a capacity allocation policy from the approximate dynamic programming formulation. In addition, we present a deterministic linear programming model that gives an upper bound on the optimal expected revenue from the intractable dynamic programming model. As the problem size becomes large in terms of flight capacity and the expected number of arrivals, we demonstrate an asymptotic lower bound for the deterministic linear programming model. Our extensive numerical study indicates that offering commitment options can noticeably increase potential revenue even though offering a contingent commitment option may not always be in the best interest of the airline. Also, our results show that the proposed approximate dynamic programming model coordinates capacity allocation and commitment decisions quite well.

Keywords: revenue management; airline; contingent commitment option; dynamic programming (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ortrsc:v:51:y:2017:i:4:p:1031-1045

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