Capacity and pricing policies with consumer overflow behavior

We analyze consumers’ choice and overflow behavior between two potential market segments with different fares, capacity allocated, and then develop the optimal capacity and pricing polices assuming such consumers’ strategic behavior can be observed. Every consumer prefers to choose a fare to obtain their utmost value surplus, and select the second if the first-best choice cannot be satisfied. Our study indicates that the effort of fencing the segments should be considered to cope properly with pricing and capacity decisions in order to direct the overflows. Disregarding overflows could create differences in decisions as well as economic consequences. The study results can be implemented, but not limited, to understand the flight seat allocation problem with strategic consumers.