oa An integrated approach to fare pricing, seat inventory control and fare class segmentation in airline industry with demand leakage

Differentiated pricing is a widely practiced revenue management (henceforth, RM) tactic in which a firm offers its products/services at differentiated prices to distinct markets. This strategy has also been noticed in airline RM for more than four decades. Earlier research has shown that the benefits from differentiated pricing are evident when the market segmentation is assumed perfect, which are regarded as distinct markets with deterministic demands. In perfect market segmentation, customers associated with a market segment do not cannibalize (move) between market segments. However, it is not uncommon to notice that the market segmentation is seldom prefect, regardless of the type of industry, and demand is often uncertain. As a result, passengers are expected to cannibalize between fare classes, which is also referred as demand leakage. This research addresses the issue of establishing an integrated framework to optimize market segmentation, often referred as fare class, fare price, and seat inventory control for an airline that experiences demand leakage. Three distinct models are proposed to determine the optimal market segmentation, fare pricing, and seat inventory control for an airline that experiences price dependent passenger demand which are deterministic demand, stochastic, and when the demand is stochastic, yet the demand is unknown respectively. The models are analyzed to determine an optimal joint control mechanism for market segmentation, fare pricing, and seat inventory control and it is shown that the revenue functions to airline are jointly concave. Numerical experimentation shows how do the problem related parameters impact the airline's optimal control strategy and upon airline's revenue gains.