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: | Kleywegt Anton J., Homem-de-Mello Tito, Cooper William L. |
Keywords: | forecasting: applications |
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.