A Discrete Choice Model of Yield Management

UPF Economics and Business Working Paper No. 533

20 Pages Posted: 29 Jun 2001

Abstract

Customer choice behavior, such as "buy-up" and "buy-down", is an important phenomenon in a wide range of industries. Yet there are few models or methodologies available to exploit this phenomenon within yield management systems. We make some progress on filling this void. Specifically, we develop a model of yield management in which the buyers' behavior is modeled explicitly using a multi-nomial logit model of demand. The control problem is to decide which subset of fare classes to offer at each point in time. We formulate a dynamic program to determine the optimal control policy and show that it reduces to a dynamic nested allocation policy.

Keywords: Yield management, revenue management, discrete choice theory, airlines, dynamic programming

JEL Classification: C13, C14

Suggested Citation

Talluri, Kalyan and van Ryzin, Garrett, A Discrete Choice Model of Yield Management. UPF Economics and Business Working Paper No. 533, Available at SSRN: https://ssrn.com/abstract=273420 or http://dx.doi.org/10.2139/ssrn.273420

Kalyan Talluri (Contact Author)

Imperial College Business School ( email )

387A Business School
South Kensington Campus
London, London SW7 2AZ
United Kingdom
+44 (0)20 7594 1233 (Phone)

HOME PAGE: http://https://www.imperial.ac.uk/people/kalyan.talluri

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