Pricing strategies under customer recapture in airline revenue management

Abstract

Airline revenue management (RM) focuses on techniques such as dynamic variation of price and seat inventory control. There is a lack of sufficient literature on pricing strategies in competitive environments. In this research we attempt to address the problem of optimal seat allocation and pricing in a duopoly where each of the competing airlines has two fare-classes. We study Nash equilibrium (NE) by extending the work of Mazumdar and Ramachandran (2014) by including the phenomena of recapturing of passengers who overflow to the competitor's airline. We develop optimisation models which incorporate this condition and develop an algorithm to obtain their optimal solutions. These solutions determine the pay-offs in the formulation of the underlying strategic form game between the competing airlines. The NE of this game under various scenarios are finally computed and analysed.