Perishable-asset revenue management: Generic and multiple-price yield management with diversion

In any situation of fixed capacity and a perishable service or product, firms want to avoid spoilage of the service or product and receive the most revenue possible in the face of uncertain demand. Stimulation of demand from price-sensitive customers, however, through discount prices to customers that reserve early can help fill capacity. This is attractive if non-price-sensitive customers can be prevented from diverting to the lower rates. This paper provides generic results for deciding how many discount units to sell (the so-called yield-management problem) and extends the generic problem in several ways: (1) to situations with continuous, not discrete resources, (2) to treatment of yield management jointly with overbooking, and (3) to problems with diversion with more than two price classes. Simulation studies using airline data suggest that our decision rules perform better than previous rules now used in practice.