The Airline Discount Fare Allocation Problem

ABSTRACT This paper describes a useful extension of the well‐known, single‐period inventory or newsboy problem. Given a fixed number of identical seats available on a scheduled airline flight, what percentage should be offered for early sale at a predetermined discount fare and what percentage reserved for later sale at a higher full fare? This two‐tiered pricing strategy with early discount pricing might be appropriate in any situation in which the price sensitivity of the inventoried items decreases as the end of the period approaches. Similar to the newsboy problem solution, the decision rule that maximizes expected profit is expressed as a simple function of the percentage difference in the two fares and two carefully defined probabilities.