Models of the spiral-down effect in revenue management

William L. Cooper, Tito Homem-de-Mello, Anton J. Kleywegt

Research output: Contribution to journalArticlepeer-review

105 Scopus citations

Abstract

The spiral-down effect occurs when incorrect assumptions about customer behavior cause high-fare ticket sales, protection levels, and revenues to systematically decrease over time. If an airline decides how many seats to protect for sale at a high fare based on past high-fare sales, while neglecting to account for the fact that availability of low-fare tickets will reduce high-fare sales, then high-fare sales will decrease, resulting in lower future estimates of high-fare demand. This subsequently yields lower protection levels for high-fare tickets, greater availability of low-fare tickets, and even lower high-fare ticket sales. The pattern continues, resulting in a so-called spiral down. We develop a mathematical framework to analyze the process by which airlines forecast demand and optimize booking controls over a sequence of flights. Within the framework, we give conditions under which spiral down occurs.

Original languageEnglish (US)
Pages (from-to)968-987
Number of pages20
JournalOperations research
Volume54
Issue number5
DOIs
StatePublished - Sep 2006

Keywords

  • Forecasting: estimation and control
  • Pricing: revenue management
  • Probability: applications

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