Abstract
Some airlines now offer fare-lock options, which allow passengers to hold a ticket for some time with a small fee while finalizing their travel plans. In this paper, we model passenger behavior in the presence of a fare-lock option and study the corresponding airline’s dynamic pricing problem. We prove some monotonicity properties and generate a number of managerial insights on possible implications of the fare-lock option on the airline’s revenue and optimal pricing structure, the social welfare, and the passenger surplus. We also develop an approximation algorithm that is capable of generating near-optimal solutions for large problem instances quickly.
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