Abstract
Tools to restrict customer migration across segments are referred to as 'fences' in revenue management. However, most fences are not perfect and allow some degree of demand leakage from the high-priced market segment to the low-priced segment. In this paper, we lay out the theoretical foundation of fencing, develop the basic assumption of imperfect fences, and present an approach to modelling demand leakage among different market segments. We next propose cost functions representing the effort devoted to fences, and establish the connection between such costs and revenue gain created from market segmentation. Furthermore, we illustrate the effect of fencing using an analytical model. Specifically, we investigate the impact of fences on firms' simultaneous price and inventory decisions. We access the gain from market segmentation in the presence of imperfect fences, and show how to determine the optimal cost that should be devoted to fencing.
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