Revenue Management and e-Commerce

25th Apr 2003

Book Discription

E. Andrew Boyd | AIChENB. This paper written by: E. Andrew Boyd 


We trace the history of revenue management in an effort to illustrate a successful ecommerce model of dynamic, automated sales. Our discourse begins with a brief overview of electronic distribution as practiced in the airline industry, emphasizing the fundamental role of central reservation and revenue management systems. Methods for controlling the sale of inventory are then introduced along with related techniques for optimization and forecasting. Research contributions and areas of significant research potential are given special attention. We conclude by looking at how revenue management is practiced outside of the airline industry, its relationship to dynamic pricing, and future directions for the discipline.

E-commerce is frequently, and incorrectly, equated with the use of the Internet to transact business. While the Internet has unquestionably been at the forefront of the rapid expansion of e-commerce – providing a low-cost, ubiquitous tool for facilitating business transactions – the use of electronic media to engage in the purchase and sale of goods and services is far from new.
The most notable example can be found in the travel and hospitality industries and the airline industry in particular, which have pioneered many groundbreaking e-commerce applications for over three decades. Through the use of central reservation systems, travel and hospitality companies manage the sale of their inventory. Initially, central reservation systems were used simply to record transactions against the sale of physical inventory at a fixed price. Driven by market forces, it quickly became apparent that they could be used for better management of prices and inventory, leading to increased margins with minimal additional capital outlay. Overbooking, demand forecasting taking willingness to pay into account, optimizing the mix of fare products, and doing so dynamically evolved to the point where “rocket science” is now an apt descriptor. Collectively, these practices have
come to be known as
revenue or yield management, and they are considered essential in many industries.

We here trace the history of revenue management as practiced in the airline industry in an effort to illustrate a successful e-commerce model of dynamic, automated sales enabled by central reservation and revenue management systems. From our experience, the distribution model embodied in such systems provides a good case study