Joint optimization of airline pricing and fare class seat allocation

Although researchers have considered them as separate optimization problems, airline pricing and seat inventory control are interrelated and should ideally be considered as a single optimization problem. This article presents an approach for modeling the combined effects of pricing and fare class seat allocation on realized passenger demand, with the objective of solving for the optimal fares and fare class booking limits jointly and simultaneously. In our model, the underlying demand volume is a function of fares and we develop an approach for determining the impact of booking limits on the proportion of underlying demand that is accepted. On the basis of this insight, we formulate and solve a revenue maximization problem in which both fares and booking limits are the decision variables in a simplified problem with two fare classes and two booking periods.