Joint optimization of pricing and capacity allocation for two competitive airlines under demand uncertainty

Abstract

Nowadays, airline industries should overcome different barriers regarding the fierce competition and changing consumer behavior. Thus, they attempt to focus on joint decision making which enables them to set pricing and capacity allocation to maximize their profits. In this research, we develop a model to optimize pricing and capacity allocation in a duopoly of single-flight leg for two competitive airlines. The problem considers actual assumptions about flexible partitions in flight's cabins and additionally demand uncertainty. There is a flexible partitioning of business and economy cabins and demand is assumed price-dependent with additive uncertainty. The capacity and pricing decisions are simultaneously determined through indirect channels. Moreover, a numerical study is developed to investigate how market components and competition conditions change pricing, capacity, and profit levels. The results show that increasing market volume like decreasing price sensitivity provides higher levels of price and profits. Moreover, intensified competition never leads to higher prices. Thus, a competitive network of airlines provides better impact on market mechanism to achieve competitive prices for both economy and business classes.