Dynamic simultaneous fare proration for large-scale network revenue management

P Kemmer, A K Strauss and T Winter
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P Kemmer: Lufthansa Systems, Berlin, Germany
A K Strauss: University of Warwick, Coventry, UK
T Winter: Lufthansa Systems, Berlin, Germany

Journal of the Operational Research Society, 2012, vol. 63, issue 10, 1336-1350

Abstract: Network revenue management is concerned with managing demand for products that require inventory from one or several resources by controlling product availability and/or prices in order to maximize expected revenues subject to the available resource capacities. One can tackle this problem by decomposing it into resource-level subproblems that can be solved efficiently, for example by dynamic programming. We propose a new dynamic fare proration method specifically having large-scale applications in mind. It decomposes the network problem by fare proration and solves the resource-level dynamic programs simultaneously using simple, endogenously obtained dynamic marginal capacity value estimates to update fare prorations over time. An extensive numerical simulation study demonstrates that the method results in tightened upper bounds on the optimal expected revenue, and that the obtained policies are very effective with regard to achieved revenues and required runtime.

Date: 2012
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