A Bilevel Modeling Approach to Pricing and Fare Optimization in the Airline Industry Authors

The airline revenue management problem can be decomposed into four distinct but related sub-problems that are usually treated separately: demand forecasting, overbooking, capacity allocation and pricing. Over the last decades, much interest has been devoted to the overbooking and capacity allocation issues and, today, most major airlines rely on computerized tools to deal with these two sub-problems. Pricing, however, has received less attention, which can be explained by the technical and theoretical difficulties inherent to the implementation of a practical Pricing Decision Support System. In this paper, we present a new modelling approach that allows for the joint solution of the capacity allocation and pricing sub-problems faced by a major North American airline. Using predefined booking limits, the resulting model can also applied be used in a “pure” pricing context. Our approach is based on the bilevel programming paradigm, a special case of hierarchical mathematical optimization. This modelling technique makes it possible to take into account matters such as customer segmentation, behavior with regard to fares and other product attributes, and the interactions induced by overlapping routes, which are typical of modern air transportation networks.