A Research on Booking Limit Decision with Diversion & Strategic Customer Behavior

Revenue management is the application of information systems and pricing strategies to allocate capacity to the demand and is concerned with demand-management decisions and methodology. Traditionally, in most airline revenue management model for seat capacity allocation, demand for a fare class does not depends on demand for other fare classes. Belobaba (1989) developed the most widely used heuristic approach for airline seat capacity allocation which was known as expected marginal seat revenue (EMSR). He assumed the demands for different fare classes were independent, However, customers will buy other fare class tickets if the originally requested fare were unavailable or will postpone their purchase decisions in anticipation of reopening of the lower fare in the next period. These customer buying behavior has a considerable profit implication, which was ignored in many earlier studies. We investigate the impact of customer behavior on the optimal booking limits and the expected revenues under a single-period and a two-period setting. We show how to find optimal booking limits of the problem and provide numerical examples to illustrate the impact.