Abstract
We examine a seat allocation game between two airlines for flights with two fares with dependent random demands. The strategic variable of this game is each airline's booking limit for the low fare. We have shown that there exists an equilibrium booking strategy such that both airlines will protect the same number of seats for the full fare and the total number of seats available for the discount fare under competition is smaller than the total number of seats that would be available if the two airlines collude. A numerical example is used to illustrate the equilibrium solutions and to examine the impact of the capacity shares and the level of dependency between random demands.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
References
Anderson, C. K. and Wilson, J. G. (2003) ‘Wait or buy? The strategic consumer: pricing and profit implications’, Journal of the Operational Research Society, 54, 299–306.
Beckman, M. J. (1958) ‘Decision and team problems in airline reservations’, Econometrica, 26, 10–17.
Belobaba, P. P. (1987) ‘Application of probabilistic decision model to airline seat inventory control’, Operations Research, 37, 16–23.
Belobaba, P. P. and Weatherford, L. R. (1996) ‘Comparing decision rules that incorporate customer diversion’, Decision Sciences, 27, 343–350.
Brumelle, S. L., McGill, J. I., Oum, T. H., Sawaki, K. and Tretheway, M. W. (1990) ‘Allocation of airline seat between stochastically dependent demands’, Transportation Science, 24, 183–192.
Karjalainen, R. (1992) ‘The newsboy game’, Working Paper, Wharton School, University of Pennsylvania.
Li, M. Z. F., Zhang, A. and Zhang, Y. (2007) ‘Airline seat allocation competition’, Working Paper, Nanyang Business School, Nanyang Technological University, Singapore.
Lippman, S. A. and McCardle, K. F. (1997) ‘The competitive newsboy’, Operations Research, 45, 54–65.
Littlewood, K. (1972) ‘Forecasting and control of passenger bookings’, AGIFORS Symposium Proceedings, 12, 95–117.
Netessine, S. and Shumsky, R. A. (2005) ‘Revenue management games: horizontal and vertical competition’, Management Science, 51, 813–831.
Parlar, M. (1988) ‘Game theoretic analysis of the substitutable product inventory problem with random demands’, Naval Research Logistics, 35, 397–409.
Pfeifer, S. A. (1989) ‘The airline discount fare allocation problem’, Decision Sciences, 20, 149–157.
Tirole, J 1988 The Theory of Industrial Organization, MIT Press, Cambridge, MA.
Topkis, D. M. (1978) ‘Minimizing a submodular function on a lattice’, Operations Research, 26, 305–321.
Topkis, D. M. (1979) ‘Equilibrium points in nonzero-sum n-person submodular games’, SIAM Journal of Control and Optimization, 17, 773–787.
Wilson, S. A., Anderson, C. K. and Kim, S. W. (2006) ‘Optimal booking limits in the presence of strategic consumer behaviour’, International Transactions in Operational Research, 13, 99–110.
Acknowledgements
Tae H. Oum likes to acknowledge the research grant support from Natural Science and Engineering Research Council (NSERC) of Canada. Michael Li likes to thank Sauder School of Business, University of British Columbia and the School of Hotel Administration, Cornell University for hosting his visits at the end of 2005 and in 2006, respectively, when the part of the work was done. He is grateful to Professors Sheryl Kimes and Tae Oum for their hospitality and support during his visit.
Author information
Authors and Affiliations
Corresponding author
Additional information
1 Michael Li is an associate professor at the Nanyang Business School, Nanyang Technological University where he is servicing courses in management science, revenue management and stochastic processes. Revenue Management is one of his main research areas.
2 Tae Oum (E-mail: oum@sauder.ubc.ca) is the UPS Foundation Chair in Transport and Logistics at the Sauder School of Business, The University of British Columbia, and the president of Air Transport Research Society. He is the Editor of the Journal of Transport Economics and Policy.
3 Chris K. Anderson (E-mail: cka9@cornell.edu) is an assistant professor of operations management at the School of Hotel Administration, Cornell University where he teaches and researches revenue management. He has provided revenue management and pricing consulting services across numerous industries including airlines, rental cars, hotels, packaged vacations, consumer packaged goods and financial services.
Rights and permissions
About this article
Cite this article
Li, M., Oum, T. & Anderson, C. An airline seat allocation game. J Revenue Pricing Manag 6, 321–330 (2007). https://doi.org/10.1057/palgrave.rpm.5160108
Received:
Revised:
Published:
Issue Date:
DOI: https://doi.org/10.1057/palgrave.rpm.5160108