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RahulSyamlal

SantiagoJ.PadillaSada

AirlineTicketPricing
Introduction

Asanyonethathastraveledbyairplanecanattestto,airlineticketpricesareinaconstantstateofflux.
Formostconsumers,themostapparentfactorsthatinfluenceairlinepricesinclude:theamountof
distancetraveled,thepopularityoftheairroute(e.g.NYtoLAvs.CHItoSF),thenumberofdaysbefore
departure,andsociopoliticalfactors(e.g.war,pandemics,travelban,etc)specifictothearrivaland
departurelocations.Consideringthesefactors,consumershavesomesenseofwhatareasonableprice
shouldbe.Andthesereasonablepricesaredeterminedbytheairlinecompaniesthatsetthem.
Forourproject,wewantedtotryandmodelthepricingstrategythatanairlinecompanywouldusefor
agivenflightinordertoseehowreasonablepricesaredetermined.

OurApproach

OurmodelconsiderspricingadirectflightfromChicago,IL,USAtoMonterrey,MexicoonaWednesday.
Throughsomeresearch,wedeterminedthattheseatingcapacityforaBoeing737,themostcommonly
usedairplaneforrelativelyshortinternationalflights,isaround220.Thus,wechose220asthe
maximumnumberofseatsontheflight.Wealsochose7daysasthemaximumnumberofdaysbefore
departurewhencustomerswouldstartbuyingtickets.
OurpricingstrategyismodeledasaMarkovDecisionProcess,whereeachstateincludesthenumberof
dayslefttodepartureandthenumberofseatsleftinintervalsof10seatsontheflight:
State I = {# of days before departure, # of seats left}

Theactionstakenateachstatearedrawnfromthefollowingsetofprices($):{300,400,500,600,700,
800}.
Action k = {300, 400, 500, 600, 700, 800}

Thenumberofpeoplethatareinterestedinbuyingticketsonagivendaywasmodeledasarandom
variablewithaPoissondistributionofmean( )equaltothetotalnumberofseatsdividedbythetotal
numberofdaysinthemodel.Inotherwords,weassumedthattheaveragenumberofpeople
interestedinbuyingaticketwasconstanteveryday.Wealsocreatedadiscreteprobabilitydistribution
functionforthechancethatacustomerwaswillingtopayagivenprice.

= total # of seats/ maximum # of days left before departure = 220 / 7 = 31.4


Number of people interested in buying a ticket = N ~ Poisson( )
q(p) = chance that someone is willing to buy a ticket at price p =
Price

800.00

700.00

600.00

500.00

400.00

300.00

Probability

0.09

0.12

0.16

0.18

0.21

0.24

Number of people that buy a ticket on a given day at a given price = Np ~ Poisson ( * q(p))

Therewardorrevenuefunctionforagivenstateandpricewassimplythepricemultipliedwiththe
expectednumberofpeoplebuyingtickets:
R(I, k) = p * E[ Np ] = p *

* q(p)

ThetransitionprobabilitieswerecalculatedbyfindingthevalueofthePoissondistributionfunctionfor
thenumberofseatssoldduringagivenstatetransition:
P(j | I, k) = P( Poisson ( ) = (#of seats left in j) (# of seats left in i))

WethenformulatedtheMarkovDecisionProcessasalinearprogramandusedExcelslinearsolverto
findoptimalconstraintvaluesforeachstate:
min j f(i)
s.t. f(i) - R(i,k) + j P(j|i,k) * f(j) for all i,k 0

Wemadeourpricingdecisionsbylookingatwhichstatesconstraintvalueswere0;avalueof0
indicatesthatthepricesetforthatspecificconstraintprovidestheoptimalamountofrevenueforthe
givenstate.

Results

Wefoundthatpriceincreasesoccurwheneitherthereisonlyonedaytodepartureorwhenthereisa
scarcityofseats.Aslongastherearemorethan50unsoldseatsleftontheflight,thepriceshouldbeset
atthelowestintherangeofprices,$300,upuntilthelastdayofdeparture.
Onanygivendaybeforethelastday,ourmodelshowsthatwhentherearelessthan50unsoldseatsin
theflightthepriceincreasesrapidlywithrespecttothedecreaseinthenumberofunsoldseats.Ifthere
arebetween50and30seatsleft,thepriceshouldbeincreasedto$400;between30and20seatsleft,
thepriceshouldincreasefurtherto$500;between20and10seatsleft,thepriceshouldincrease
furtherstillto$600;finally,iftherearebelow10seatsleftintheflight,thepriceshouldbeincreasedto
$700.
Onthelastdaybeforedeparture,thepriceshouldberaisedfrom$300to$400aslongasthereare
morethan50unsoldseatsleftontheflight.Below50unsoldseats,andthepriceincreasesasdescribed
aboveexceptforoneexception:thepriceincreasesto$500iftherearebetween40and30seatsleft.
Ourmodelalsoshowsthatsettingthepriceto$800doesntprovideoptimalrevenueforanystate.

Analysis

Forthemostpart,theresultsfromourmodelseemtobefairlyintuitive.Itmakessensethattheprice
increasesasthenumberofunsoldseatsdecreasesandasthedaytodeparturecomescloser.However,
itwasinterestingtonotehowquicklythepriceincreasedasthenumberofunsoldseatswentbelow50.
Itshardtosaywhetherornotairlinecompaniesincreasetheirticketpricesatasimilarratewhenthe
numberofunsoldseatssinksbelowsomelevel.
Thefactthatthemodelfoundthatsettingthepriceto$800neverprovidedoptimalrevenueshowsthat
$800,asonewouldexpect,isanunreasonableprice.Inordertoconfirmthis,wewantedtoseeif
increasingthegranularityinthenumberofseatsleftfromintervalsof10seatstosimplyoneseat
decreaseswouldgiveusconditionswheresettingthepriceto$800wouldmakesense;however,dueto
thecomputationalconstraintsofExcelssolver,wewerentabletocomputeananswer.Similarly,
increasingthemaximumamountofdaysbeforedeparturewasntcomputationalpossible.Thefailed
attemptstoaccomplishthisandtheevolutionofourlinearprogramcanbeseenintheextrasheetsof
ourModelsExceldocumentnamedTry1,Try2,andTry3.
Ifweweretofurtherdevelopthislinearprogram,wewouldtrytoconsiderchangingthewaywe
estimatedthecustomer'swillingnesstopay.Forourestimateofthisprobability,weconsideredthatthe
willingnesstopayforeachcustomerdependedonlyontheprice.Abettermodelwouldbeonethat
alsoconsidersthedaysleftuntildeparture,wherethecloseritistothedeadline,themoredesperate
thecustomeristobuytheticket.Wecouldincludethisinourmodelbyusingtwoseparateprobabilities
orpossiblycombinetheminsomeway.Thischangeinourmodelwouldmakeitbetterapproximate
reality.

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