Monday, April 5, 2010

Revenue Management with Opaque Products

Blog readers interested in the business side of aviation may want to read Jochen Goensch & Claudius Steinhardt's new paper, Revenue Management with Opaque Products (Working Paper, Mar. 29, 2010) (available from SSRN here).  From the abstract:

In recent years, opaque selling has evolved into a popular instrument of price discrimination used in many service industries. Opaque products are designed in such a way that some of their characteristics are hidden from the customer until after purchase. Prominent examples include Internet-based intermediaries like Hotwire and Priceline, which sell, for example, airline tickets by disguising details of the service provision like the departure time or the operating airline until the booking has been made. The main benefit of opaque products is the induction of additional low-value demand; however, due to the inherent supplier-driven substitution, the traditional revenue management process changes. In this paper, we therefore propose a capacity control approach that allows opaque products to be incorporated. Our approach is based on the well-known dynamic programming decompositionthat is widely used for traditional revenue management – in theory as well as in commercial software implementations. Analytically, we show that the obtained upper bound on the original dynamic program’s value is tighter than the one obtained by constructing a deterministic linear approximation. Furthermore, we perform computational experiments, using typical airline revenue management scenarios, which show that the developed approach significantly outperforms other well-known capacity control approaches adapted to the opaque product setting.

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