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Continuous pricing algorithms for airline RM: revenue gains and competitive impacts

Author

Listed:
  • Bazyli Szymański

    (Massachusetts Institute of Technology)

  • Peter P. Belobaba

    (Massachusetts Institute of Technology)

  • Alexander Papen

    (Massachusetts Institute of Technology
    Amadeus IT Group)

Abstract

Traditionally, airlines have been limited to a set of fixed fare classes and, in turn, price points, to distribute their fare products. The advent of IATA’s new distribution capability (NDC) will soon enable airlines to quote any fare from a continuous range. In theory, such continuous pricing could increase revenues by extracting more of the consumer surplus, through its ability to offer more granular fares, closer to the customer’s willingness-to-pay (WTP). In this article, we describe several algorithms that lead to the quotation of a single fare from a continuous range. These algorithms either rely on traditional fare classes for the purpose of forecasting and optimization (class-based), or completely abandon the notion of fare classes, instead assuming different WTP distributions within each booking period prior to departure (classless). We describe how these algorithms build upon and differ from their traditional RM counterparts. Performance of these heuristics is then benchmarked against traditional class-based RM, and competitive impacts are analyzed when continuous pricing is adopted by one airline asymmetrically or both airlines symmetrically in a hypothetical 2-carrier network in the passenger origin–destination simulator (PODS). We find that continuous pricing is generally revenue-positive, and the revenue gains can be as high as 2.0% for the first-mover and reach up to 1.2% when both airlines adopt the new method. In addition, we show that these gains depend on the number of fare classes in the traditional fare structure used as a baseline, and that they are smaller under lower demand-to-capacity ratios.

Suggested Citation

  • Bazyli Szymański & Peter P. Belobaba & Alexander Papen, 2021. "Continuous pricing algorithms for airline RM: revenue gains and competitive impacts," Journal of Revenue and Pricing Management, Palgrave Macmillan, vol. 20(6), pages 669-688, December.
  • Handle: RePEc:pal:jorapm:v:20:y:2021:i:6:d:10.1057_s41272-021-00350-x
    DOI: 10.1057/s41272-021-00350-x
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    References listed on IDEAS

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    Cited by:

    1. Resul Aydemir & Mehmet Melih Değirmenci & Abdullah Bilgin, 2023. "Estimation of passenger sell-up rates in airline revenue management by considering the effect of fare class availability," Journal of Revenue and Pricing Management, Palgrave Macmillan, vol. 22(6), pages 501-513, December.
    2. Yanbin Long & Peter Belobaba, 2024. "Airline revenue management with segmented continuous pricing: methods and competitive effects," Journal of Revenue and Pricing Management, Palgrave Macmillan, vol. 23(1), pages 14-27, February.

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