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Efficient frontiers in revenue management

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Journal of Revenue and Pricing Management Aims and scope

Abstract

We consider the problem of generating the efficient frontier (or Pareto set) between two business goals in a pricing and revenue management context. We show that, under standard conditions on the demand function, the efficient frontier between revenue and profit will be continuous, bounded, downward-sloping and concave when pricing a single product. For the single-leg revenue management problem, we show that the efficient frontier between any two goals that are linear in load, such as revenue, load factor and operating contribution, can be efficiently generated using a weighted-sum (or scalarization) approach. We give some numerical examples of the weighted sum approach applied to the discrete-time single leg revenue management problem, as well as applied to an Expected Marginal Seat Revenue heuristic. We discuss possible extensions to a general choice model and to a full network.

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Notes

  1. The terms ‘efficient frontier’, ‘Pareto frontier’ and ‘Pareto set’ are often used interchangeably in the literature.

  2. It should be noted that the term ‘efficient frontier’ has been used in the revenue management literature to denote the undominated combinations of total expected demand and total expected revenue that could be achieved from different combinations of choice sets. This use of the term ‘efficient frontier’ – which is different from ours – was introduced by Talluri and van Ryzin (2004) and used in this sense in some other papers dealing with choice modeling such as Maglaras (2006).

  3. Load factor is defined as the number of passengers carried on a flight departure (the load) divided by the capacity of the flight. It is a commonly used metric in the passenger airline industry.

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Acknowledgements

I am grateful to Robin Raffard of Nomis Solutions for his very detailed and useful comments on an earlier version of this article. I am also grateful to two anonymous reviewers for their very useful comments and suggestions.

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  1. Columbia University School of Business, Nomis Solutions, New York, NY, USA

    Robert Phillips

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  1. Robert Phillips
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Correspondence to Robert Phillips.

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Phillips, R. Efficient frontiers in revenue management. J Revenue Pricing Manag 11, 371–385 (2012). https://doi.org/10.1057/rpm.2011.26

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