Outsmarting Human Design in Airline Revenue Management

Abstract

The accurate estimation of how future demand will react to prices is central to the optimization of pricing decisions. The systems responsible for demand prediction and pricing optimization are called revenue management (RM) systems, and, in the airline industry, they play an important role in the company’s profitability. As airlines’ current pricing decisions impact future knowledge of the demand behavior, the RM systems may have to compromise immediate revenue by efficiently performing price experiments with the expectation that the information gained about the demand behavior will lead to better future pricing decisions. This earning while learning (EWL) problem has captured the attention of both the industry and academia in recent years, resulting in many proposed solutions based on heuristic optimization. We take a different approach that does not depend on human-designed heuristics. We present the EWL problem to a reinforcement learning agent, and the agent’s goal is to maximize long-term revenue without explicitly considering the optimal way to perform price experimentation. The agent discovers through experience that “myopic” revenue-maximizing policies may lead to a decrease in the demand model quality (which it relies on to take decisions). We show that the agent finds novel pricing policies that balance revenue maximization and demand model quality in a surprisingly effective way, generating more revenue over the long run than current practices.