Models of the spiral-down effect in revenue management. (English) Zbl 1167.91385

Cooper, William L.; Homem-De-Mello, Tito; Kleywegt, Anton J.

Oper. Res. 54, No. 5, 968-987 (2006).

Summary: 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.

MSC:

91B42

Consumer behavior, demand theory