Simulation shows not to panic about bid price dysfunction close to departure

Abstract

We have seen many times over the years where bid prices drop precipitously in the last few days of the booking process, thus potentially opening up cheap seats at a time when passengers with the greatest willingness to pay are shopping. The research question studied here is whether an airline can effectively apply a bid price floor or freeze, in the last week or two of the booking process to increase revenue in a competitive environment with four competing airlines. This paper will provide the answer to the above question in the Passenger Origin–Destination Simulator (PODS) Network U10 (a large international network with 572 origin–destination markets, including a low-cost carrier). The results show how challenging it is to find a combination of O–D optimization method, overbooking level, and time-frame that are effective. In fact, only unbucketed dynamic programming (vector) and overbooking with a floor or freeze in the last 7 days is consistently revenue positive.