Revenue Management Under a General Discrete Choice Model of Consumer Behavior

Customer choice behavior, such as buy-up and buy-down, is an important phenomenon in a wide range of revenue management contexts. Yet most revenue management methodologies ignore this phenomenon—or at best approximate it in a heuristic way. In this paper, we provide an exact and quite general analysis of this problem. Specifically, we analyze a single-leg reserve management problem in which the buyers' choice behavior is modeled explicitly. The choice model is very general, simply specifying the probability of purchase for each fare product as a function of the set of fare products offered. The control problem is to decide which subset of fare products to offer at each point in time. We show that the optimal…