Estimating the Gains (and Losses) of Revenue Management

Abstract

If the rise of revenue management (RM) has increased flexibility in the way firms set their prices, firms usually still impose constraints on their pricing strategy. There is yet scarce evidence on the gains or losses of such strategies compared to uniform pricing or fully flexible strategies. In this paper, we quantify these gains and losses and identify their underlying sources in the context of French railway transportation. We develop for that purpose a structural model of demand and supply of train tickets. Demand cannot be identified in a standard way due to censoring and the absence of instruments. We develop an original strategy combining temporal variations in relative prices and moment inequalities stemming from basic rationality on consumers’ side and weak optimality conditions on the firm’s pricing strategy. Our results suggest significant gains of the actual RM compared to uniform pricing, but also substantial losses compared to the optimal pricing strategy. Finally, we highlight the key role of RM for acquiring information when demand is uncertain. joint avec Philippe Février, Ao Wang et Lionel Wilner (CREST)