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Revenue management under joint pricing and capacity allocation competition

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  • Zhao, Xuan
  • Atkins, Derek
  • Hu, Ming
  • Zhang, Wensi

Abstract

We investigate joint pricing and capacity allocation decisions of a duopoly, each of which competes in selling a fixed amount of substitutable perishable goods in both early discount and regular full-fare markets with demand uncertainty. Upon a firm’s stockout, unsatisfied demand spillovers to the competitor, depending on the substitutability of products offered by the two firms. We first show that there exists a pure-strategy Nash equilibrium. For identical firms, there exists a unique pure-strategy Nash equilibrium that is symmetric. Then we study how firms’ pricing and capacity allocation decisions depend on operational and market conditions. In particular, we show that more cut-throat competition in the full-fare market never leads to a rise in the price and a fall in the protection level simultaneously in the full-fare market. We demonstrate a similar result of comparative statics for the competition intensity in the discount market. In comparison with a monopolist’s optimal decision, a duopoly equilibrium never results in a situation that definitely benefits the full-fare consumers in both dimensions of price and availability. Finally, we examine how the adoption of early discount, as practiced in the airline industry, may benefit competing firms. When one of the two firms first introduces early discount sales, we find that there is a “free-ride” effect for the other firm. Interestingly, the “free-rider” can benefit more than the adopter, especially with stronger competition.

Suggested Citation

  • Zhao, Xuan & Atkins, Derek & Hu, Ming & Zhang, Wensi, 2017. "Revenue management under joint pricing and capacity allocation competition," European Journal of Operational Research, Elsevier, vol. 257(3), pages 957-970.
  • Handle: RePEc:eee:ejores:v:257:y:2017:i:3:p:957-970
    DOI: 10.1016/j.ejor.2016.08.025
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    References listed on IDEAS

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    2. Güler, Kemal & Körpeoğlu, Evren & Şen, Alper, 2018. "Newsvendor competition under asymmetric cost information," European Journal of Operational Research, Elsevier, vol. 271(2), pages 561-576.
    3. Kyparisis, George J. & Koulamas, Christos, 2018. "Optimal pricing and seat allocation for a two-cabin airline revenue management problem," International Journal of Production Economics, Elsevier, vol. 201(C), pages 18-25.
    4. Zhu, Chenbo & Hu, JianQiang, 2020. "Revenue management games with government mandate," Omega, Elsevier, vol. 93(C).
    5. Taherkhani, Gita & Bilegan, Ioana C. & Crainic, Teodor Gabriel & Gendreau, Michel & Rei, Walter, 2022. "Tactical capacity planning in an integrated multi-stakeholder freight transportation system," Omega, Elsevier, vol. 110(C).
    6. Sato, Kimitoshi, 2019. "Price Trends and Dynamic Pricing in Perishable Product Market Consisting of Superior and Inferior Firms," European Journal of Operational Research, Elsevier, vol. 274(1), pages 214-226.
    7. Yu, Shunan & Yang, Zhongzhen & Zhang, Wei, 2019. "Differential pricing strategies of air freight transport carriers in the spot market," Journal of Air Transport Management, Elsevier, vol. 75(C), pages 9-15.
    8. Torsten J. Gerpott & Jan Berends, 2022. "Competitive pricing on online markets: a literature review," Journal of Revenue and Pricing Management, Palgrave Macmillan, vol. 21(6), pages 596-622, December.
    9. Liu, Yezheng & Qian, Yang & Jiang, Yuanchun & Shang, Jennifer, 2020. "Using favorite data to analyze asymmetric competition: Machine learning models," European Journal of Operational Research, Elsevier, vol. 287(2), pages 600-615.
    10. Wenzhu Zhang & Yue Dai & Lin Tian, 2021. "Pricing strategies for competitive firms with indirect network effects," Flexible Services and Manufacturing Journal, Springer, vol. 33(2), pages 547-581, June.
    11. Doraid Dalalah & Mohammad Khasawneh & Sharafuddin Khan, 2022. "Pricing and demand management of air tickets using a multiplicative newsvendor model," Journal of Revenue and Pricing Management, Palgrave Macmillan, vol. 21(5), pages 517-528, October.

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