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Competitive revenue management

Srinivas Krishnamoorthy, 2005
Faculty Advisor: Guillermo Gallego
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Abstract

Revenue management refers to the set of methods for capacity allocation and pricing used by airlines, hotels and other industries with fixed, perishable capacity. This thesis explores game theoretic models for revenue management.

We first analyze a market with two capacity providers---an entrant and an incumbent---each with fixed capacity, who compete to sell in a spot market and a forward market. Prices are fixed and the providers make strategic capacity allocation decisions. The model is designed to study the competitive interactions between a low cost entrant, who sells at a lower price in both the forward and the spot market, and an established incumbent. The key question investigated is the type of equilibrium behavior we could expect from the two providers under different assumptions about market structure, demand, and available capacity.

Next, we analyze dynamic games between the providers: (a) a sequential game where the incumbent plays first followed by the entrant, and (b) a repeated game where both providers make simultaneous decisions but do this repeatedly an infinite number of times. Demand is either from a single buyer or a population of independent consumers. We identify outcomes for the sequential game for varying levels of demand. For the repeated game; we identify the existence of subgame-perfect Nash equilibria and show how the two providers can obtain higher average revenues by implicit collusion.

Finally, we look at a Bertrand-Edgeworth inspired price setting model for two competing providers---an entrant and an incumbent---who have fixed capacities and may possibly have differing capital costs. The model captures elements of value-based pricing as well as competitive pricing. We explore patterns of equilibrium behavior under different assumptions about capital costs, market size and available capacity. The equilibrium results explain the volatility in prices in markets where providers have near identical cost structures as well as the price differentials observed in markets where providers have differing cost structures.

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