【 Title】 Pricing of Conditional Upgrades in the Presence of Strategic Consumers

【Presenter】Dr. Yao Cui

【Host】 Dr. Simin Huang

【Date】Thursday, Dec. 17, 2015, 13:00-14:00

【Venue】Room 412, Shunde Building

【Language】English

【Abstract】In this paper, we study a conditional upgrade strategy that has recently become common in the travel industry. After a consumer makes a reservation for a product (e.g., a hotel room), she is asked whether she would like to upgrade to a higher-quality (more expensive) one at a discounted price. The upgrade, however, is not fulfilled immediately. The firm fulfills upgrades at check-in if higher-quality products are still available, and the upgrade fee is only charged to the consumer if she gets upgraded. Consumers decide which product type to book and whether to accept an upgrade offer based on the anticipated upgrade probability. We model the consumers‘ decisions using a Poisson-arrival game framework with incomplete information and prove the existence of Bayesian Nash equilibrium. To further study the firm‘s optimal upgrade pricing strategy, we also analyze a fluid model which is the asymptotic version of the stochastic model. Our numerical studies validate that our theoretical results derived from the fluid model carry through to the stochastic model.Our analysis identifies multiple benefits of conditional upgrades. First, the firm is able to capture more demand by offering conditional upgrades, i.e., the consumers who value original product types lower than the original prices but value higher-quality products higher than the discounted price with upgrades. Second, conditional upgrades enable the firm to improve its market segmentation by inducing more consumers to purchase higher-quality products. Third, conditional upgrades give the firm more flexibility in better matching fixed capacities to stochastic demands. For a firm that is a price taker, offering conditional upgrades is effective in compensating for the firm‘s lack of ability in setting its prices optimally, and can sometimes generate even higher revenues than being able to optimize product prices. For a firm that has the ability to optimize product prices, conditional upgrades can generate higher revenues than dynamic pricing.

【Bio】Yao Cui is an Assistant Professor of Operations, Technology and Information Management at the Samuel Curtis Johnson Graduate School of Management at Cornell University. Prior to joining Johnson, he received his doctoral degree from the Stephen M. Ross School of Business at the University of Michigan and his bachelor degree from Department of Industrial Engineering at Tsinghua University. Professor Cui‘ s research interests are in pricing and revenue management, with an emphasis on providing firms with insights about innovating pricing strategies and incorporating consumer behaviors in novel pricing strategies. His research explores the interface between operations management and other fields including marketing and microeconomics. His research paper, “Should Event Organizers Prevent Resale of Tickets?” (published in Management Science), won the first place in the 2013 INFORMS Service Science Section‘s Best Student Paper Competition. At Johnson, Professor Cui teaches the operations management core course for MBAs and EMBAs.

All interested are welcome!