Models of the spiral-down effect in revenue management

Models of the spiral-down effect in revenue management

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Article ID: iaor20081294
Country: United States
Volume: 54
Issue: 5
Start Page Number: 968
End Page Number: 987
Publication Date: Sep 2006
Journal: Operations Research
Authors: , ,
Keywords: forecasting: applications
Abstract:

The spiral-down effect occurs when incorrect assumptions about customer behavior cause high-fare ticket sales, protection levels, and revenues to systematically decrease over time. If an airline decides how many seats to protect for sale at a high fare based on past high-fare sales, while neglecting to account for the fact that availability of low-fare tickets will reduce high-fare sales, then high-fare sales will decrease, resulting in lower future estimates of high-fare demand. This subsequently yields lower protection levels for high-fare tickets, greater availability of low-fare tickets, and even lower high-fare ticket sales. The pattern continues, resulting in a so-called spiral down. We develop a mathematical framework to analyze the process by which airlines forecast demand and optimize booking controls over a sequence of flights. Within the framework, we give conditions under which spiral down occurs.

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