Optimal pricing and seat allocation in the airline industry under the market competition

The current practice of revenue management is either quantity based or price based. A quantity based revenue management is most commonly observed in the airline industry; whereas a price based revenue management is practiced in retail enterprises. Recent improvement of information technology has not only increased the market size, but also has increased market competition. In a competitive environment customers choose among substitutable products depending on several rationalities, however a paramount factor in most selections is price. This thesis investigates pricing issue in revenue management and makes three contributions. First, price based revenue management is studied in the airline industry in a competitive market. Airlines compete for customers using their fare pricing strategies while having fixed capacity allocated in each fare class. The demand for each fare class of an airline is dependent on its fare price and the fare price offered by rival airline(s). A game theoretic approach is used to address the problem assuming both the deterministic and stochastic price sensitive customer demand for each fare class. The existence and uniqueness of Nash equilibrium for the game is shown for both deterministic and stochastic demands. A sensitivity analysis is carried out to determine fare pricing in each fare class considering various situations in the case of deterministic demand. The analysis is further extended to stochastic price sensitive demand, and a sensitivity analysis of the fare prices for each fare class is also reported. Second, an integrated approach to price and quantity based revenue management with an application to the airline industry is presented. The models proposed enable joint control of fare pricing and seat allocation in a duopoly competitive market. Both non cooperative and cooperative bargaining games are studied. Numerical experimentation is performed to study both competitive and cooperative fare pricing along with seat inventory control assuming a nested control on booking limits. In the case of a non cooperative game, Nash equilibrium for the competing airlines is determined assuming both symmetric and asymmetric market competition. A sensitivity analysis based on a statistical design of experiments is also presented to study the behavior of the game. Statistical evidence is established which shows that cooperation improves the revenue to the competing airlines. Lastly, a distribution free approach for pricing in revenue management is explored. The approach assumes the worst possible demand distribution and optimizes the lower bound estimate on revenue, while jointly controlling the price and capacity. The approach is first addressed to revenue management's most commonly observed standard newsvendor problem. Extensions to the problem are identified which can be applied to airline industry. Later the analysis is extended to consider the following cases: a shortage cost penalty; a holding and shortage cost; a recourse cost, with a second purchasing opportunity; and the case of random yields. An application of the approach is also suggested to capacity constrained industries facing restrictions such as limited budget. A numerical study reveals that the approach results in a near optimal estimate on revenue. Using a statistical comparison it is also shown that the outcomes of the standard newsvendor problem are significantly different than its extension