IDEAS home Printed from https://ideas.repec.org/a/inm/ormnsc/v51y2005i5p813-831.html
   My bibliography  Save this article

Revenue Management Games: Horizontal and Vertical Competition

Author

Listed:
  • Serguei Netessine

    (The Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania 19103-6340)

  • Robert A. Shumsky

    (Simon School of Business Administration, University of Rochester, Rochester, New York 14627)

Abstract

A well-studied problem in the literature on airline revenue (or yield) management is the optimal allocation of seat inventory among fare classes, given a demand distribution for each class. In practice, the seat allocation decisions of one airline affect the passenger demands for seats on other airlines. In this paper, we examine the seat inventory control problem under both horizontal competition (two airlines compete for passengers on the same flight leg) and vertical competition (different airlines fly different legs on a multileg itinerary). Such vertical competition can be the outcome of a code-sharing agreement between airlines, because each airline sells seats on the partner airlines' flights but the airlines are unwilling, or unable, to coordinate yield management decisions. We provide a general sufficient condition under which a pure-strategy Nash equilibrium exists in these revenue management games, and we also compare the total number of seats available in each fare class with, and without, competition. Analytical results as well as numerical examples demonstrate that more seats are protected for higher-fare passengers under horizontal competition than when a single airline acts as a monopoly. Under vertical competition the booking limit may be higher or lower, however, than the monopoly level, depending on the demand for connecting flights in each fare class. Finally, we discuss revenue-sharing contracts that coordinate the actions of both airlines.

Suggested Citation

  • Serguei Netessine & Robert A. Shumsky, 2005. "Revenue Management Games: Horizontal and Vertical Competition," Management Science, INFORMS, vol. 51(5), pages 813-831, May.
    • Handle: RePEc:inm:ormnsc:v:51:y:2005:i:5:p:813-831
    DOI: 10.1287/mnsc.1040.0356
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1287/mnsc.1040.0356
    Download Restriction: no
    File URL: https://libkey.io/10.1287/mnsc.1040.0356?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Borenstein, Severin & Netz, Janet, 1999. "Why do all the flights leave at 8 am?: Competition and departure-time differentiation in airline markets," International Journal of Industrial Organization, Elsevier, vol. 17(5), pages 611-640, July.
    2. Jan K. Brueckner, 2003. "International Airfares in the Age of Alliances: The Effects of Codesharing and Antitrust Immunity," The Review of Economics and Statistics, MIT Press, vol. 85(1), pages 105-118, February.
    3. Gregory Dobson & Phillip J. Lederer, 1993. "Airline Scheduling and Routing in a Hub-and-Spoke System," Transportation Science, INFORMS, vol. 27(3), pages 281-297, August.
    4. Richard, Oliver, 2003. "Flight frequency and mergers in airline markets," International Journal of Industrial Organization, Elsevier, vol. 21(6), pages 907-922, June.
    5. Karlin, Samuel & Rinott, Yosef, 1980. "Classes of orderings of measures and related correlation inequalities II. Multivariate reverse rule distributions," Journal of Multivariate Analysis, Elsevier, vol. 10(4), pages 499-516, December.
    6. Joseph J. Spengler, 1950. "Vertical Integration and Antitrust Policy," Journal of Political Economy, University of Chicago Press, vol. 58(4), pages 347-347.
    7. Serguei Netessine & Nils Rudi, 2003. "Centralized and Competitive Inventory Models with Demand Substitution," Operations Research, INFORMS, vol. 51(2), pages 329-335, April.
    8. Phillip J. Lederer & Ramakrishnan S. Nambimadom, 1998. "Airline Network Design," Operations Research, INFORMS, vol. 46(6), pages 785-804, December.
    9. Brueckner, Jan K & Whalen, W Tom, 2000. "The Price Effects of International Airline Alliances," Journal of Law and Economics, University of Chicago Press, vol. 43(2), pages 503-545, October.
    10. Jeffrey I. McGill & Garrett J. van Ryzin, 1999. "Revenue Management: Research Overview and Prospects," Transportation Science, INFORMS, vol. 33(2), pages 233-256, May.
    11. Karlin, Samuel & Rinott, Yosef, 1980. "Classes of orderings of measures and related correlation inequalities. I. Multivariate totally positive distributions," Journal of Multivariate Analysis, Elsevier, vol. 10(4), pages 467-498, December.
    12. Borenstein, Severin & Rose, Nancy L, 1994. "Competition and Price Dispersion in the U.S. Airline Industry," Journal of Political Economy, University of Chicago Press, vol. 102(4), pages 653-683, August.
    13. S. L. Brumelle & J. I. McGill & T. H. Oum & K. Sawaki & M. W. Tretheway, 1990. "Allocation of Airline Seats between Stochastically Dependent Demands," Transportation Science, INFORMS, vol. 24(3), pages 183-192, August.
    14. Peter P. Belobaba, 1989. "OR Practice—Application of a Probabilistic Decision Model to Airline Seat Inventory Control," Operations Research, INFORMS, vol. 37(2), pages 183-197, April.
    15. Siddharth Mahajan & Garrett van Ryzin, 2001. "Inventory Competition Under Dynamic Consumer Choice," Operations Research, INFORMS, vol. 49(5), pages 646-657, October.
    16. Belobaba, Peter P. & Wilson, John L., 1997. "Impacts of yield management in competitive airline markets," Journal of Air Transport Management, Elsevier, vol. 3(1), pages 3-9.
    17. Steven A. Lippman & Kevin F. McCardle, 1997. "The Competitive Newsboy," Operations Research, INFORMS, vol. 45(1), pages 54-65, February.
    18. Mahmut Parlar, 1988. "Game theoretic analysis of the substitutable product inventory problem with random demands," Naval Research Logistics (NRL), John Wiley & Sons, vol. 35(3), pages 397-409, June.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ko, Young Dae, 2019. "The airfare pricing and seat allocation problem in full-service carriers and subsidiary low-cost carriers," Journal of Air Transport Management, Elsevier, vol. 75(C), pages 92-102.
    2. Li, Tingting & Xie, Jinxing & Lu, Shengmin & Tang, Jiafu, 2016. "Duopoly game of callable products in airline revenue management," European Journal of Operational Research, Elsevier, vol. 254(3), pages 925-934.
    3. Dasci, A. & Karakul, M., 2009. "Two-period dynamic versus fixed-ratio pricing in a capacity constrained duopoly," European Journal of Operational Research, Elsevier, vol. 197(3), pages 945-968, September.
    4. Geng, Qin & Mallik, Suman, 2007. "Inventory competition and allocation in a multi-channel distribution system," European Journal of Operational Research, Elsevier, vol. 182(2), pages 704-729, October.
    5. Jeffrey I. McGill & Garrett J. van Ryzin, 1999. "Revenue Management: Research Overview and Prospects," Transportation Science, INFORMS, vol. 33(2), pages 233-256, May.
    6. Zhu, Chenbo & Hu, JianQiang, 2020. "Revenue management games with government mandate," Omega, Elsevier, vol. 93(C).
    7. Lei Lei & Jun Ru & Ruixia Shi & Jun Zhang, 2022. "A Two‐Product Newsvendor Problem with Partial Demand Substitution," Production and Operations Management, Production and Operations Management Society, vol. 31(3), pages 1157-1173, March.
    8. Vishal Gaur & Young-Hoon Park, 2007. "Asymmetric Consumer Learning and Inventory Competition," Management Science, INFORMS, vol. 53(2), pages 227-240, February.
    9. Xuan Zhao & Derek R. Atkins, 2008. "Newsvendors Under Simultaneous Price and Inventory Competition," Manufacturing & Service Operations Management, INFORMS, vol. 10(3), pages 539-546, September.
    10. Shin, Hojung & Park, Soohoon & Lee, Euncheol & Benton, W.C., 2015. "A classification of the literature on the planning of substitutable products," European Journal of Operational Research, Elsevier, vol. 246(3), pages 686-699.
    11. Dongling Cai & Li Jiang, 2020. "The Bright and Dark Sides of Customer Switching," Production and Operations Management, Production and Operations Management Society, vol. 29(6), pages 1381-1396, June.
    12. Silbermayr, Lena, 2020. "A review of non-cooperative newsvendor games with horizontal inventory interactions," Omega, Elsevier, vol. 92(C).
    13. Cynthia Barnhart & Peter Belobaba & Amedeo R. Odoni, 2003. "Applications of Operations Research in the Air Transport Industry," Transportation Science, INFORMS, vol. 37(4), pages 368-391, November.
    14. Brueckner, Jan K. & Flores-Fillol, Ricardo, 2020. "Market structure and quality determination for complementary products: Alliances and service quality in the airline industry," International Journal of Industrial Organization, Elsevier, vol. 68(C).
    15. Lin, Kyle Y. & Sibdari, Soheil Y., 2009. "Dynamic price competition with discrete customer choices," European Journal of Operational Research, Elsevier, vol. 197(3), pages 969-980, September.
    16. Zhang, Jian & Zhang, Juliang & Hua, Guowei, 2016. "Multi-period inventory games with information update," International Journal of Production Economics, Elsevier, vol. 174(C), pages 119-127.
    17. Ye, Taofeng, 2014. "Inventory management with simultaneously horizontal and vertical substitution," International Journal of Production Economics, Elsevier, vol. 156(C), pages 316-324.
    18. He, Shuang & Zhang, Jian & Zhang, Juliang & Cheng, T.C.E., 2022. "Production/inventory competition between firms with fixed-proportions co-production systems," European Journal of Operational Research, Elsevier, vol. 299(2), pages 497-509.
    19. Houyuan Jiang & Zhan Pang, 2011. "Network capacity management under competition," Computational Optimization and Applications, Springer, vol. 50(2), pages 287-326, October.
    20. Shi, Chunming (Victor) & Yang, Shilei & Xia, Yu & Zhao, Xuan, 2011. "Inventory competition for newsvendors under the objective of profit satisficing," European Journal of Operational Research, Elsevier, vol. 215(2), pages 367-373, December.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:inm:ormnsc:v:51:y:2005:i:5:p:813-831. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Asher (email available below). General contact details of provider: https://edirc.repec.org/data/inforea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.