The key to a successful implementation of any yield management strategy is getting to know the consumers. Large firms invest tremendous amounts of money on research seeking to characterize their own customers as well as potential consumers.
In economic theory, the most useful instrument for characterizing consumer behavior is the demand function. A demand function shows the quantity demanded by an individual, a group, or all the consumers in a given market, as a function of market prices, and some other variables.

This chapter introduces basic pricing techniques. By basic we refer to techniques that are limited to simple one-time purchases of a single good only. That is, the simple techniques studied in this chapter do not address more sophisticated markets in which products and services are differentiated by the time of delivery, the length of the booking period, quantity discounts (bundling), and services that are tied with other products and services. In fact, some of basic pricing techniques described in this chapter can also be found in most intermediate college microeconomics textbooks. Clearly, readers must first understand these basic techniques
before proceeding to more sophisticated ones analyzed in later chapters.

Bundling and tying are widely used instruments for implementing price discrimination. Market segmentation is therefore accomplished by offering consumers a
variety of packages to choose from. When bundling is used, by choosing different packages, consumers implicitly reveal their willingness to pay for different quantity levels of the same good. That is, consumers with a high preference for large quantities will choose large bundles, whereas consumers with a low preference for large quantities will choose small bundles, or simply buy one unit, if available. Similarly, when tying is used, consumers implicitly reveal their preferences for some other types of goods, which are tied to the sale of the original good. Both the bundling and tying pricing techniques constitute special cases of nonlinear pricing under which the price of each unit may vary with the total number of units
purchased.

Multipart tariffs constitute another widely practiced technique of nonlinear pricing, under which the price of each unit may vary with the total number of units purchased. To some degree, multipart tariffs can be viewed as an enhancement of the bundling marketing strategy analyzed earlier in Section 4.1. By an enhancement we mean that instead of limiting the pricing strategy to a fixed price for a certain number of goods bundled together in a single package, multipart tariffs consist of a fixed fee and per-unit prices that may vary with the amount consumed.
Multipart tariffs in general, and two-part tariffs in particular, are widely used.

Services constitute what economists call nonscorable goods. Electricity, telephone, transportation, banking, and most other services are consumed at the time of purchase. This monitorability characteristic of services may lead to congestion of service systems when the demand for the service is unevenly distributed among different periods or seasons. The demand for telephone services is at the highest level during daytime, during weekdays, and tends to be lower during nights, weekends, and some holidays. The demand for air travel for most places tends to be relatively high during the summer, whereas the demand for transportation to ski resorts is greatly enhanced during the winter. Electricity use follows a daily cycle related partly to the use of appliances and lighting devices. In addition, it also follows a yearly cycle because of climatic changes. Thus, the demand follows several, sometimes overlapping, periodic cycles

Service providers, particularly providers of services related to travel, engage in advance booking that use a wide variety of advance reservation systems. Fromconsumers’ perspective, this practice seems to be beneficial for the following two reasons:
• Value of time and capacity constraint: Advance reservations save considerable amount of time for consumers as otherwise they would have to travel several
times to the theater, airport, train station, or hotel, just to find out that these services may have already been fully booked.
• Purchase of complementary services: Travel arrangements almost always consist of a wide variety of complementary services that must be booked from multiple providers (flights, trains, hotels). In addition, travelers must alter their work
schedule, which may include asking for vacation time or a leave of absence. Advance reservations ensure the fulfilment of these multiple obligations at the same time.

Refunds are widely observed in almost all privately provided services and also to some degree in retail industries. Refunds are heavily used by travel-related service providers. Most noticeably, refunds are heavily used by airlines where cheaper tickets allow for a very small refund (if any) on cancellations and no-shows, whereas full-fare tickets are either fully refundable or are subject to low cancellation penalty rates.

We define overbooking as a strategy whereby service providers accept and confirm more reservations than the capacity they allocate for providing the service. Thus,
the overbooking strategy may result in service denial to some consumers if the number of actual show-ups at the time of service exceeds the allocated capacity.
Overbooking should be considered an integral part of the advance booking strategy of service providers. In this chapter, we demonstrate how service providers can increase their profits by using overbooking. Thus, in this chapter, we relax
Assumption 7.3, which so far has ruled out the use of the overbooking strategy

This chapter analyzes some additional pricing techniques and marketing tactics intended to further enhance sellers’ profits. Section 10.1 links pricing decisions to innovation and product design decisions by computing the profit-maximizing
quality levels and service classes to be introduced into the market. The underlining assumption in this analysis is that sellers cannot directly price discriminate among the different consumer groups. Therefore, the seller must devise a price scheme under which consumers belonging to different consumer groups choose to purchase different quality levels.