Author(s)

Jun Chen, Hui Chen, Shiyan Xu

Corresponding Author

Hui Chen

Abstract

We study the air ticket inventory competition of two flights and two levels of air ticket price for each flight.Each flight has a fixed initial capacity and prices andcompetes in setting the optimal stopping region to maximize the total expected revenue over a finite sales horizon. Customers are divided into three types according to their desire. The choice behavior can be described as a horizontal diversion and vertical diversion of demand; the choice probability depends on the current prices. Assuming the arrival process is homogeneous Poisson distribution, we presented the seat allocation model and found that Nash equilibrium was applicable in the allocation model. The optimal policy derived is a threshold policy, which simplified the model and improved computational efficiency. Numerical experiments describe the application of the model in the real world and the strong linkage between the threshold, rival’s strategy and ratio of different passengers.

Keywords

Revenue Management; Seat Allocation; Competition; Nash Equilibrium