On a semi-dynamic pricing and seat inventory allocation problem

Motivated by the practice of airlines, this paper considers the following problem. Tickets are offered at a limited number of predetermined price levels, and the price is only allowed to change monotonically. Management needs to determine the number of seats to be sold at each discount fare with an objective of maximizing the revenue. Such a semi-dynamic pricing and seat allocation approach improves the static pricing approach, as it allows a certain degree of pricing flexibility, but it compromises the potential revenue maximization of the dynamic pricing approach. Therefore, a natural question is what is the magnitude of the revenue loss by such a semi-dynamic approach? The primary objective of this paper is to gain insights into this question. Based on structural results, numerical experiments show that the semi-dynamic pricing approach generates near-optimal revenue.