Models of the Spiral-Down Effect in Revenue Management

Authors:
William L. Cooper;Tito Homem-de-Mello;Anton J. Kleywegt
Affiliations:
Department of Mechanical Engineering, University of Minnesota, Minneapolis, Minnesota 55455;Department of Industrial Engineering and Management Sciences, Northwestern University, Evanston, Illinois 60208;School of Industrial and Systems Engineering, Georgia Institute of Technology, Atlanta, Georgia 30332-0205
Venue:
Operations Research
Year:
2006

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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.