Pricing at Vocram Airways (A)

Description

In 2010, the owner of a small air-passenger firm transports individuals and small groups to remote waterfront regions. The business serves two types of customers: private and public. The private customers can afford to pay more, while the public customers’ budget constraints limit what they can pay. The owner wants to set a single price that will maximize his expected revenue across both customer groups. A constraining factor is the plane’s limited capacity, which means the owner cannot accommodate all requests. In other words, after a flight has been sold out, seats may still be requested by customers who potentially might be willing to pay more. See supplement 9B13E014.

Learning Objective

This case is intended as an intermediate case for both undergraduate and MBA students. It has been used in a revenue management course as part of a session on setting prices when: 1) limited capacity exists, and 2) two sources of uncertainty surround the potential customers (i.e., [a] customers belong to different segments or groups, and [b] within each group, customers differ in their willingness-to-pay or valuation). The learning objective is for students to develop their modelling skills in formulating the problem and deriving the optimal single price for the service.

Keywords

canada Markov chain Pricing Revenue Management