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Pricing of Conditional Upgrades in the Presence of Strategic Consumers

Author

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  • Yao Cui

    (Samuel Curtis Johnson Graduate School of Management, Cornell University, Ithaca, New York 14853)

  • Izak Duenyas

    (Stephen M. Ross School of Business, University of Michigan, Ann Arbor, Michigan 48109)

  • Ozge Sahin

    (Carey Business School, Johns Hopkins University, Baltimore, Maryland 21202)

Abstract

In this paper, we study a conditional upgrade strategy that has recently emerged in the travel industry. After a consumer makes a reservation for a product (e.g., a hotel room), she is asked whether she would like to upgrade her product to a higher-quality (more expensive) one at a discounted price. The upgrade, however, is not fulfilled immediately. The firm fulfills upgrades at check-in if higher-quality products are still available, and the upgrade fee is charged to the consumer if and only if she actually gets upgraded. Consumers decide which product type to book and whether to accept an upgrade offer or not based on the anticipated upgrade probability. We find that conditional upgrades create value by improving demand–supply matching for the firm. The firm can use the conditional upgrade channel to flexibly manage capacity allocations and reoptimize demand segmentation. For a firm that takes product prices as given, offering conditional upgrades is effective in compensating for the firm’s lack of ability in setting prices optimally. For a firm that has the ability to optimize product prices, conditional upgrades generate higher revenues than dynamic pricing.

Suggested Citation

  • Yao Cui & Izak Duenyas & Ozge Sahin, 2018. "Pricing of Conditional Upgrades in the Presence of Strategic Consumers," Management Science, INFORMS, vol. 64(7), pages 3208-3226, July.
    • Handle: RePEc:inm:ormnsc:v:64:y:2018:i:7:p:3208-3226
    DOI: 10.1287/mnsc.2017.2783
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    Cited by:

    1. Liao, Chen-Nan & Chen, Ying-Ju, 2019. "Role of exchangeable tickets in the optimal menu design for airline tickets," Omega, Elsevier, vol. 89(C), pages 151-163.
    2. Yao Cui & A. Yeşim Orhun & Izak Duenyas, 2019. "How Price Dispersion Changes When Upgrades Are Introduced: Theory and Empirical Evidence from the Airline Industry," Management Science, INFORMS, vol. 65(8), pages 3835-3852, August.
    3. Yaqin Lin & Chun-Hung Chiu, 2023. "Effectiveness of Discount Incentives in Carbon Reduction: Impact of Customer-Perceived Value Sacrificed for Green Hotels," Sustainability, MDPI, vol. 15(16), pages 1-21, August.
    4. Andrei M. Bandalouski & Natalja G. Egorova & Mikhail Y. Kovalyov & Erwin Pesch & S. Armagan Tarim, 2021. "Dynamic pricing with demand disaggregation for hotel revenue management," Journal of Heuristics, Springer, vol. 27(5), pages 869-885, October.

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