Dynamic Pricing of Parallel Flights Based on Customer's Choice Behaviors

Revenue management is based on offering the right product to the right customer at the right time. Revenue management scientists have concluded that traditional tools must be restructured based on the economic crisis, which has changed customers’ behavior, and also the advent of low cost carriers, which attract a significant share of the customers. These new carriers offer a simplified fare structure and lower fares, and they apply price-based revenue management techniques. Dynamic pricing has several advantages, such as increase in revenue; goal oriented pricing and leveling capacity usage among resources. One of the challenges of the parallel flight sets is aggregating demand on specific flights, which can be overcome by applying dynamic pricing techniques. In this article a dynamic pricing technique based on customer choice behavior is presented for low cost carriers. Choice-based deterministic linear programming is used for approximating marginal values of resources by dual prices. These values are applied for approximating the dynamic programming problem for pricing of substitutable products. A multinomial logit model is used for modeling customer choice behavior. The proposed system is goal oriented and charges lower prices for leisure customers and higher prices for business. Monte Carlo simulation is applied and two pricing strategies; dynamic and fixed pricing, are analyzed and their results compared. The case study results show that for ample capacity compared to demand, application of a fixed pricing strategy with a price point that has low utility leads to a noticeable reduction in the company’s revenue. In the case of force for using a fixed pricing policy, different factors such as initial capacity, demand and customer utility should be considered to choose suitable prices. Simultaneously with limiting initial capacity, dynamic pricing will move towards fixed pricing with higher price points.