Airline seat allocation competition

This paper examines the classical seat allocation problem under competition between two airlines with different cost structure. The cost asymmetry that has been ignored in the yield management literature can be caused by either operations or distributions. We investigate the decision problem of two airlines offering two identical fare classes under both the simultaneous and sequential allocations. For both allocation cases, we show the existence, uniqueness and stability of pure-strategy Nash equilibrium under a reasonable condition on the ratios of relative profit margins of the two fare classes. We find that there will be fewer seats protected for the full-fare class if the discount seats can be booked first. We found that the asymmetry in costs has two effects on the equilibrium solutions: (a) an airline behaves aggressively for the fare class where it enjoys a cost advantage; (b) an airline tends to balance the trade-offs internally when it has absolute cost advantage in both fare classes. In deriving the collusive solution for both cases for comparative purposes, we discover new insights by solving the two-flight, two-fare seat allocation problem with different cost structures on the two flights. In particular, we show that rivalry in full-fare seat protection leads to a Prisoners' Dilemma for the carriers. Finally, a numerical example is used to illustrate various analytical results.