Pricing Simulation Proven solutions for open skies Presentation, AGIFORS 2000 24th March 2000 in New York Pricing Simulation Natascha Jung, Senior Operation Research Specialist Proven solutions for open skies 1 1

Agenda Supported Pricing Processes Pricing Simulation Modeling Summary

Pricing Simulation in Reactive Pricing Trigger Automated Decision Decision Support Decision Action Statistics Competitor Fare Action Pricing Simulation No No Auto Matching Manual Matching Don’t know ! Yes Yes We distinguish between different phases, which are a trigger phase, the automated decision making phase, the decision support phase, the decision phase and the final action phase A competitor fare action is the trigger in Reactive Pricing. An auto matching procedure can handle many reactions based on easy to define rules. Life Fare Mapping helps in identifying the competing own fare classes. Via Pricing Simulation the impact of matching/non- matching can be calculated/predicted. Reactions are distributed via an automated distribution procedure. Automated Distribution

Pricing Simulation in Proactive Pricing Trigger Possible Actions Simulation/ Action Evaluation Pricing Simulation Open Capacity Special Event Pricing What-If Modeling Evaluate Scenario Automated Distribution Yes New Destination Many different triggers exist for Proactive Pricing, e.g. open capacity special event pricing new destination Based on the trigger a lot of different action scenarios can be taken into consideration. Via Pricing Simulation the impact of the scenarios can be calculated/predicted; Like Fare Mapping again helps in getting a structured market overview. Reactions are distributed via an automated distribution procedure. ...

Agenda Supported Pricing Processes Pricing Simulation Modeling Summary

What should a Pricing Simulation Model do? Simulating the impact of Amount Changes Condition and Restriction changes New or Canceled Fares on Market Share Passenger Demand Revenue by considering Cannibalization Competitor Reaction Market Stimulation Revenue Management effects

How should a Pricing Simulation Model work ? Constrained Processing Unconstrained Processing Market Share Constrained Processing Passenger Demand Revenue Revenue Management Simulation Competitor Reaction Market Stimulation Price Elasticity Model Unconstrained Demand Model Revenue Calculation

Price Elasticity Model

What should a Price Elasticity Model do? Depiction of Passenger Behavior: Passenger books on a special Ticketing Day and chooses among the offered fares, which are valid on his Travel day - The day, on which passenger wants to fly Customer makes decision along several attributes of the fare

How could passenger behavior be depicted? Price Elasticity Model Qualitative Choice Model Multinomial Logit Model Choice Set: Applicable fares per Ticketing/Travel - combination Day Application Advance Purchase Booking Class open (Constrained Processing) Attribute Set: Compartment Carrier Amount Minimum/Maximum Stay

The difficulties of the Price Elasticity Model ...... Independence of Irrelevant Alternatives (IIA - Property) Customer Heterogeneity Calibration data for estimation of the parameters

How could IIA - Property be avoided ? Price Elasticity Model Selection of the choice set dependent on the Ticketing - and Travel day Clustering of the choice set Compartment Carrier Amount Minimum/Maximum Stay

Customer Heterogeneity - Which passengers might behave homogenous? Price Elasticity Model Business passengers Spilled Passengers (Constrained Processing) Leisure passengers Stimulated passengers

How could the Price Elasticity Model be estimated? For each passenger type Passenger Preference Parameter Compartment Carrier Preference/Schedule Quality Amount Minimum Stay Maximum Stay Price Elasticity Model Calibration Input Data Merge of MIDT- and ATPCO Data

Revenue Management Simulation

Why Revenue Management Simulation? Passenger Preference Airline Interest

What should a Revenue Management Simulation do ? Optimization of revenue by determining the size of booking classes Capacities expected Demand Depiction the yield management impact on the passenger behavior

How should a Revenue Management Simulation work? Algorithm for optimizing revenue Back Loop to Price Elasticity Model for depicting influence of the yield management on passenger behavior

The difficulties of Revenue Management Simulation .... The need of simulating revenue management effects for all carriers Optimization Algorithm Re - Calculation of Protection Level Estimation of expected Demand and Capacities

How could the difficulties be solved? Optimization Algorithm Usage of a common Algorithm nested EMSRb Re- Calculation of Protection Level Re-Calculation in view to the results of the PEM in the Back-Loop Estimation of expected Demand/Capacities Estimation with MIDT Data Actual Flown Data OAG Revenue Management Simulation

Agenda Supported Pricing Processes Pricing Simulation Modeling Summary

Summary Pricing Simulation should take into account all essential Pricing Decision Rules Competitor Reaction Cannibalization Market Stimulation Revenue Management Effects The model should be designed along data sources available in practice