Revenue Management for Low-Cost Providers
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Marcus, Benjamin; Anderson, Chris K.
Low-cost providers have emerged as important players in many service industries, the most predominant being low-cost, or the so-called discount airlines. This paper presents models and results leading toward understanding the revenue management outlook for a discount pricing firm. A framework and model is formulated specifically for the airline industry, but is generalizable to low-cost providers in similar revenue management settings. We formulate an optimal pricing control model for a firm that must underprice to capture a segment of exogenous demand. Two specific model formulations are considered: a continuous deterministic version, and a discrete stochastic version. Structural results are derived for the deterministic case, providing insight into the general form of optimal underpricing policies. The stochastic results support the structural insight from the deterministic solution, and illuminate the effect of randomness on the underpricing policies.
revenue management; dynamic pricing; control theory
Required Publisher Statement: © Elsevier . Final version published as: Marcus, B., & Anderson, C. K. (2008). Revenue management for low-cost providers. European Journal of Operational Research, 188(1), 258-272. DOI: 10.1016/j.ejor.2007.04.010. Reprinted with permission. All rights reserved.