Revenue maximization by optimizing the price structure

Abstract

In the context of maximizing revenue, the author examines and finds an optimal pricing strategy for airline tickets that maximizes the total revenue from a flight. This will be determined by the number of days left until departure, the seasonal period, together with the demand and the customers' buying behavior. To optimize the ticket price, the author will develop analytical models to describe the booking patterns of previous customers over the selling period for each flight. Using these models, it will be possible to find expressions for the optimal price structure for a single flight. These models will then be applied to three different methods, a Deterministic method which determines the optimal price structure with the use of specific constraints related to the price, a Stochastic Programming method, and in particular, the Multi-Period Stochastic Programming (MPSP), which considers all possible scenarios and determines the optimal price structure, and a Dynamic method which combines the use of Calculus of Variations together with Lagrangian Multiplier to find the optimal price structure. The results obtained after applying these methods are then compared and analyzed. Finally, a method suitable for the local market is selected and implemented.