The Applications of Revenue Management and Pricing

Revenue Management (RM) and pricing may be described as the art of selling products to the right customers at the right prices. The concept is based on the assumption that different customers are willing to pay different prices for the same product and that by differentiating the price according to customer characteristics, overall revenue can be maximized. While the term “Revenue Management” often refers to the problem of defining the amount of products to be offered at one price, the term “pricing” usually refers to the problem of defining optimal prices. Historically (Bobb and Veral, 2008), Revenue Management started as an operations management function, focusing only on capacity allocation given exogenous demand estimates (Gallego and Van Ryzin, 1997). In the 1960s, American Airlines started to use Operations Research models for Revenue Management decisions. Littlewood (1972) presented the revenue maximization model through booking limits and inventory control systems. The 1980s saw Revenue Management become a robust and workable system for solving the problems of fixed capacity, time-varied demand, segmentation, perishable inventory and high fixed costs, bringing a practical solution. One significant milestone in Revenue Management was Peter Belobaba’s PhD thesis work, Air Travel Demand and Airline Seat Inventory Management (1987) which was a significant contribution to management of complexity, capacity allocation and real-time inventory solutions.