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Regret in Overbooking and Fare-Class Allocation for Single Leg

Author

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  • Yingjie Lan

    (Guanghua School of Management, Peking University, Beijing 100871, China)

  • Michael O. Ball

    (Robert H. Smith School of Business, University of Maryland, College Park, Maryland 20742)

  • Itir Z. Karaesmen

    (Kogod School of Business, American University, Washington, DC 20016)

Abstract

Focusing on a seller's regret in not acting optimally, we develop a model of overbooking and fare-class allocation in the multifare, single-resource problem in revenue management. We derive optimal static overbooking levels and booking limits, in closed form, that minimize the maximum relative regret (i.e., maximize competitive ratio). We prove that the optimal booking limits are nested. Our work addresses a number of important issues. (i) We use partial information, which is critical because of the difficulty in forecasting fare-class demand. Demand and no-shows are characterized using interval uncertainty in our model. (ii) We make joint overbooking and fare-class allocation decisions. (iii) We obtain conservative but practical overbooking levels that improve the service quality without sacrificing profits. Using computational experiments, we benchmark our methods to existing ones and show that our model leads to effective, consistent, and robust decisions.

Suggested Citation

  • Yingjie Lan & Michael O. Ball & Itir Z. Karaesmen, 2011. "Regret in Overbooking and Fare-Class Allocation for Single Leg," Manufacturing & Service Operations Management, INFORMS, vol. 13(2), pages 194-208, December.
    • Handle: RePEc:inm:ormsom:v:13:y:2011:i:2:p:194-208
    DOI: 10.1287/msom.1100.0316
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    References listed on IDEAS

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    2. Lan, Yingjie & Ball, Michael O. & Karaesmen, Itir Z. & Zhang, Jean X. & Liu, Gloria X., 2015. "Analysis of seat allocation and overbooking decisions with hybrid information," European Journal of Operational Research, Elsevier, vol. 240(2), pages 493-504.
    3. Guo, Xiaolong & Dong, Yufeng & Ling, Liuyi, 2016. "Customer perspective on overbooking: The failure of customers to enjoy their reserved services, accidental or intended?," Journal of Air Transport Management, Elsevier, vol. 53(C), pages 65-72.
    4. Wang, Wei & Lan, Yingjie, 2022. "Robust one-way trading with limited number of transactions and heuristics for fixed transaction costs," International Journal of Production Economics, Elsevier, vol. 247(C).
    5. Huina Gao & Michael O. Ball & Itir Z. Karaesmen, 2016. "Distribution-free methods for multi-period, single-leg booking control," Journal of Revenue and Pricing Management, Palgrave Macmillan, vol. 15(6), pages 425-453, December.
    6. William L. Cooper & Tito Homem-de-Mello & Anton J. Kleywegt, 2015. "Learning and Pricing with Models That Do Not Explicitly Incorporate Competition," Operations Research, INFORMS, vol. 63(1), pages 86-103, February.
    7. Wang, Xiaojia & Fung, Richard Y.K., 2014. "An option-based hedging mechanism for managing the risk of overbooking in parallel airline alliances," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 70(C), pages 146-162.
    8. Yılmaz, Seren Bilge & Yücel, Eda, 2021. "Optimizing onboard catering loading locations and plans for airlines," Omega, Elsevier, vol. 99(C).
    9. Mika Sumida & Huseyin Topaloglu, 2019. "An Approximation Algorithm for Capacity Allocation Over a Single Flight Leg with Fare-Locking," INFORMS Journal on Computing, INFORMS, vol. 31(1), pages 83-99, February.
    10. Andersson, Jonas & Jörnsten, Kurt & Nonås, Sigrid Lise & Sandal, Leif & Ubøe, Jan, 2013. "A maximum entropy approach to the newsvendor problem with partial information," European Journal of Operational Research, Elsevier, vol. 228(1), pages 190-200.
    11. Ayvaz-Cavdaroglu, Nur & Kachani, Soulaymane & Maglaras, Costis, 2016. "Revenue management with minimax regret negotiations," Omega, Elsevier, vol. 63(C), pages 12-22.
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