Competitive revenue management models with loyal and fully flexible customers

Ravi Kumar (), Wei Wang, Ahmed Simrin, Sivarama Krishnan Arunachalam, Bhaskara Rao Guntreddy and Darius Walczak
Additional contact information
Ravi Kumar: PROS Inc
Wei Wang: PROS Inc
Ahmed Simrin: Etihad Airways
Sivarama Krishnan Arunachalam: Etihad Airways
Bhaskara Rao Guntreddy: Etihad Airways
Darius Walczak: PROS Inc

Journal of Revenue and Pricing Management, 2021, vol. 20, issue 3, No 5, 256-275

Abstract: Abstract Developing practical models for capturing competitive effects in revenue management and pricing systems has been a significant challenge for airlines and other industries. The prevalent mechanisms of accounting for competitive effects rely on changing the price structure and making manual adjustments to respond to dynamically evolving competitive scenarios. Furthermore, micro-economic models have also not become popular in practice primarily because of the simplistic mechanisms proposed for modeling consumer behavior in a competitive setting. In particular, many of these models assume that the customers always seek the lowest price in the market, that is they are fully flexible. In practice, customers may display some degree of affinity or loyalty to an airline and may pay a premium for their preferred choice. On the other hand, almost all early revenue management models did not explicitly consider competitive effects and assumed that an airline’s demand only depends on their prices i.e., demand is fully dedicated to an airline (loyal). This paper develops a model to capture more realistic competitive dynamics by including both these types of customer behavior. We also develop a Bayesian machine learning based demand forecasting methodology for such models with explicit competitive considerations and show the benefit of this approach over traditional models on a real airline data set.

Keywords: Bayesian inference; Dynamic pricing; Competitive modelling; Continuous pricing (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (3)

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DOI: 10.1057/s41272-021-00311-4

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