A Discrete Choice Model of Yield Management

Customer choice behavior, such as "buy-up" and "buy-down", is an important phenomenon in a wide range of industries. Yet there are few models or methodologies available to exploit this phenomenon within yield management systems. We make some progress on filling this void. Specifically, we develop a model of yield management in which the buyers' behavior is modeled explicitly using a multi-nomial logit model of demand. The control problem is to decide which subset of fare classes to offer at each point in time. We formulate a dynamic program to determine the optimal control policy and show that it reduces to a dynamic nested allocation policy