Models of the Spiral-Down Effect in Revenue Management

William L. Cooper · Tito Homem‐de‐Mello · Anton J. Kleywegt

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Supply Chain and Inventory Management Aviation Industry Analysis and Trends Air Traffic Management and Optimization

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.

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References

1998The Theory of Learning in Games 2004The Theory and Practice of Revenue Management 2004Revenue Management Under a General Discrete Choice Model of Consumer Behavior 1990Game Theory and Economic Modelling 2003An Overview of Pricing Models for Revenue Management 1989OR Practice—Application of a Probabilistic Decision Model to Airline Seat Inventory Control 2005Special Issue Papers: Forecasting and control of passenger bookings 1993Airline Seat Allocation with Multiple Nested Fare Classes

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