Revenue Management of Callable Products

Authors:
Guillermo Gallego;S. G. Kou;Robert Phillips
Affiliations:
Department of Industrial Engineering and Operations Research, Columbia University, New York, New York 10027;Department of Industrial Engineering and Operations Research, Columbia University, New York, New York 10027;Nomis Solutions, Inc., San Bruno, California 94066
Venue:
Management Science
Year:
2008

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Abstract

A callable product is a unit of capacity sold to self-selected low-fare customers who willingly grant the capacity provider the option to “call” the capacity at a prespecified recall price. We analyze callable products in a finite-capacity setting with two fare classes where low-fare customers book first, and show that callable products provide a riskless source of additional revenue to the capacity provider. An optimal recall price and an optimal discount-fare booking limit for the two-period problem are obtained. Numerical examples show the benefits from offering callable products can be significant, especially when high-fare demand uncertainty is large. Extensions to multifare structures, network models, overbooking, and to other industries are discussed.