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published_or_final_version / Economics and Finance / Master / Master of Economics

M.Com. / Please refer to full text to view abstract

This thesis addresses the problem of pricing perishable inventories such as airline seats and hotel rooms. It also analyzes the airline seat allocation problem when two airlines compete on a single-leg flight. Finally, several existing models for seat allocation with multiple fares on a single-leg flight are compared. The pricing framework is consistent with modern yield management tools which utilize restrictions such as weekend stayover to segment the market. One model analyzed considers a restriction which is irrelevant to one set of consumers, but which the others find so onerous that they will not purchase a restricted ticket at any price. If the consumers who do not mind the restriction are less price sensitive than those who find the restriction onerous, then the thesis shows that there is an optimal policy for a monopolist which will sell fares at no more than three price levels. When two restrictions are allowed in the model, if one is more onerous than the other in the sense that the set of consumers who would not buy a ticket with the first restriction is a subset of those who would not buy it with the second restriction, then the restrictions are said to be nested. If the sets of consumers who would not buy tickets with the first restriction is disjoint from those who would not buy with the second restriction, then the restrictions are said to be mutually exclusive. If two restrictions are either nested or mutually exclusive, then a monopolist needs at most four price levels with three types (i.e. combinations of restrictions) of product. With two general restrictions, the monopolist may need five price levels with four types of product. The pricing model is applied to restrictions which are based on membership in a particular organization. For example, employees of an airline are frequently eligible for special fares. Some airlines provide special fares for government employees or for employees of certain corporations. An analysis is given to help airlines understand the costs and benefits of such arrangements. A model of two airlines competing on a single-leg flight is developed for the case where the airlines have fixed capacity and fixed price levels for two types of fares-full and discount. The airlines compete by controlling the number of discount fares which they sell. The split of the market between the airlines is modelled in two different ways. First, the airlines might share the market for a fare class proportionally to their allocation of seats to that fare class. In this case, under certain conditions, there exists an equilibrium pair of booking limits for the discount fare such that each airline will protect the same number of seats for the full fare customers, even when the demands are random and stochastically dependent. The second market sharing model assumes that the two airlines share the market demand equally. In this case, when the demands are deterministic, then there is an equilibrium solution where each airline will protect enough seats to split equally the market for the full fares. Finally, three existing seat allocation models for multi-fare single-leg flights with stochastically independent demands are compared. It is shown that the optimality conditions for each of these models are analytically equivalent, thus providing a unified approach to this problem.

This thesis addresses the problem of pricing perishable inventories such as airline seats and hotel rooms. It also analyzes the airline seat allocation problem when two airlines compete on a single-leg flight. Finally, several existing models for seat allocation with multiple fares on a single-leg flight are compared. The pricing framework is consistent with modern yield management tools which utilize restrictions such as weekend stayover to segment the market. One model analyzed considers a restriction which is irrelevant to one set of consumers, but which the others find so onerous that they will not purchase a restricted ticket at any price. If the consumers who do not mind the restriction are less price sensitive than those who find the restriction onerous, then the thesis shows that there is an optimal policy for a monopolist which will sell fares at no more than three price levels. When two restrictions are allowed in the model, if one is more onerous than the other in the sense that the set of consumers who would not buy a ticket with the first restriction is a subset of those who would not buy it with the second restriction, then the restrictions are said to be nested. If the sets of consumers who would not buy tickets with the first restriction is disjoint from those who would not buy with the second restriction, then the restrictions are said to be mutually exclusive. If two restrictions are either nested or mutually exclusive, then a monopolist needs at most four price levels with three types (i.e. combinations of restrictions) of product. With two general restrictions, the monopolist may need five price levels with four types of product. The pricing model is applied to restrictions which are based on membership in a particular organization. For example, employees of an airline are frequently eligible for special fares. Some airlines provide special fares for government employees or for employees of certain corporations. An analysis is given to help airlines understand the costs and benefits of such arrangements. A model of two airlines competing on a single-leg flight is developed for the case where the airlines have fixed capacity and fixed price levels for two types of fares-full and discount. The airlines compete by controlling the number of discount fares which they sell. The split of the market between the airlines is modelled in two different ways. First, the airlines might share the market for a fare class proportionally to their allocation of seats to that fare class. In this case, under certain conditions, there exists an equilibrium pair of booking limits for the discount fare such that each airline will protect the same number of seats for the full fare customers, even when the demands are random and stochastically dependent. The second market sharing model assumes that the two airlines share the market demand equally. In this case, when the demands are deterministic, then there is an equilibrium solution where each airline will protect enough seats to split equally the market for the full fares. Finally, three existing seat allocation models for multi-fare single-leg flights with stochastically independent demands are compared. It is shown that the optimality conditions for each of these models are analytically equivalent, thus providing a unified approach to this problem. / Business, Sauder School of / Graduate

Travel agents provide an essential range of air travel marketing services which result in large commission expenses for air carriers. Commission expenses have risen to such an extent that air transport analysts and others in Canada have openly criticized remuneration policies now in practice. They have questioned whether the travelling public is receiving a full value for the commissions which travel agents receive; they have cited rising commission expenses as evidence of economic inefficiency within the air travel marketing system. The role which the travel agent plays in the airline industry is described taking into consideration travel agents, air carriers and air passengers. Relevant background information related to the travel agent remuneration issue is presented by describing issues affecting the ability of independent agencies to provide travel services. This thesis approaches the travel agent remuneration problem using policy analysis to select a remuneration scheme which will best satisfy a select list of objectives. The objectives used in the evaluation of remuneration schemes include service objectives such as retaining travel agent impartiality, economic objectives such as implementing the "user pay" philosophy, political objectives such as avoiding obvious cross subsidization of different user groups and "regional development" objectives such as providing adequate service levels to small communities. Description of developments in issue areas including travel agent industry entry requirements, competition for market segments and the introduction of electronic reservations systems to travel agents is presented in order to better understand the likelihood of remuneration schemes achieving objectives. Three basic types of remuneration alternatives, net fare, uniform commission and incentive commission are considered. Both regulated and unregulated incentive commissions are analyzed since their impacts vary significantly. The regulated incentive commission alternative is selected as the optimal travel agent remuneration scheme. The selection of this alternative results in a compromise between the full achievement of the various objectives. Under this alternative, the benefits and costs of regulatory involvement in the setting of remuneration levels are assured. / Business, Sauder School of / Graduate

When a customer requests a discount fare, the airline must decide whether to sell the seat at the requested discount or to hold the seat in hope that a customer will arrive later who will pay more. I model this situation for a single leg flight with multiple fare classes and customers who arrive according to a semi-Markov process (possibly nonhomogeneous). These customers can request multiple seats (batch requests) and can be overbooked. Under certain conditions, I show that the value function decreases as departure approaches. If each customer only requests a single seat or if the requests can be partially satisfied, then I show that there are optimal booking curves which decrease as departure approaches. I provide counterexamples to show that this structural property of the optimal policy does not hold in general. When customers are allowed to cancel I show that booking curves exist and may be monotone in certain cases. I also consider the situation where the customer's request size and fare offered are not known, but their joint probability distribution is available, and show that under certain conditions existence of booking curves obtains, and that under further assumptions, they are monotone. Finally, the theoretical results are used in realistic numerical examples, which are compared to certain deterministic upper bounds and revenues obtained under heuristic policies. The airline yield management problem described above is an instance of a generic revenue management problem, which, in turn, can be cast into a finite horizon semi-Markov dynamic optimal control problem. I provide examples of other applications of revenue management.