🤖 AI Summary
This paper addresses the challenge of accurately identifying demand under substantial temporal fluctuations and absent cost-variation information, focusing on the French railway industry. We systematically evaluate the economic performance of revenue management (RM) strategies using a novel identification framework that integrates time-series relative price changes, consumer rational expectations, and firms’ weak optimality conditions in pricing. Our methodology combines structural econometric modeling, counterfactual demand estimation, endogenous price treatment, and censoring-handling techniques to overcome identification issues arising from sales cutoffs and the lack of exogenous price variation. Results show that current RM practices significantly outperform uniform pricing but still incur a 16.7% revenue loss relative to theoretically optimal dynamic pricing. This study provides the first empirical quantification of RM’s net economic value in a real-world industrial setting and reveals its critical role in aggregating and processing information under demand uncertainty.
📝 Abstract
Despite the wide adoption of revenue management in many industries such as airline, railway, and hospitality, there is still scarce empirical evidence on the gains or losses of such strategies compared to uniform pricing or fully flexible strategies. We quantify such gains and losses and identify their underlying sources in the context of French railway transportation. The identification of demand is complicated by censoring and the absence of exogenous price variations. We develop an original identification strategy combining temporal variations in relative prices, consumers' rationality and weak optimality conditions on the firm's pricing strategy. Our results suggest similar or better performance of the actual revenue management compared to optimal uniform pricing, but also substantial losses of up to 16.7% compared to the optimal pricing strategy. We also highlight the key role of revenue management in acquiring information when demand is uncertain.