Study on Overbooking Management with a Choice Model of Consumer Behavior

Talluri and van Ryzin provide an exact analysis of a single-leg model of revenue management under a discrete choice model of demand. They obtained some perfect conclusions, but the factors of cancellations and no-shows are not considered. This article combines a single-leg problem with these factors and formulates it into a dynamic programming model. From this model we show that the optimal policy for this problem has a quite simple form. Namely, it consists of identifying an ordered family of “efficient” subsets S₁,...,S_L, and at each point in time opening one of these sets S_k, where the optimal index k is decreasing in the reserved capacity. That is, the less capacity available, the nearer the optimal set is along this sequence. Basing on this property the overbooking management is well implemented.