Three Approaches to Revenue Management
Capacity Allocation by Fare Class
- The traditional airline approach solves a mathematical model to directly determine overbooking and seat allocation levels by fare class and flight leg.
Bid Price Method
- Calculates “opportunity cost” for units sold. An ideal approach for network Revenue Management, but its open/closed control philosophy necessitates frequent updates, and must be supplemented with other mechanisms such as safety nets, gradients and triggers.
Direct Price Adjustment
- Proposed by Gallego and Van Ryzin [1994a], [1994b]. Each instance would be priced individually. In an optimal solution, the price should jump after every sale because there is one less unit to sell in the remaining time until departure -- then decay slowly until the next sale. These formulations are extremely data intensive.