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A Framework and Models for Evaluating the Multifare Dynamic Pricing Mechanism of Low‐cost Carriers

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  • Kuancheng Huang
  • Yi‐Ya Peng
  • I‐Wen Wu

Abstract

In general, traditional airlines (legacy airlines or full‐service airlines) develop multifare mechanisms and rely on seat inventory control to make quantity‐based decisions. On the other hand, low‐cost carriers (LCCs) tend to adopt the single‐fare system and dynamically adjust the price. Nonetheless, more and more LCCs have begun to offer multiple‐fare classes so as to take advantage of market segmentation and price discrimination. In order to evaluate the effectiveness of various revenue management (RM) mechanisms, the concept of willingness‐to‐pay is applied to model the customer choice with respect to RM control decisions. Dynamic programming–based models are then developed to provide a unified framework to evaluate the dynamic pricing mechanism of LCCs against the traditional seat inventory control policy that makes the open/close decisions of the fare classes with predetermined prices. Based on the numerical experiment, it is found that the former results in significantly higher revenue than the latter.

Suggested Citation

  • Kuancheng Huang & Yi‐Ya Peng & I‐Wen Wu, 2013. "A Framework and Models for Evaluating the Multifare Dynamic Pricing Mechanism of Low‐cost Carriers," Transportation Journal, John Wiley & Sons, vol. 52(3), pages 308-322, July.
    • Handle: RePEc:wly:transj:v:52:y:2013:i:3:p:308-322
    DOI: 10.5325/transportationj.52.3.0308
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