The impact of decision types on revenue management decisions: an experimental study

Abstract

In the standard two-class revenue management model, the decision maker allocates a fixed resource between two customer classes with hierarchical prices and uncertain demand. The normative (i.e., expected revenue-maximizing) allocation is given by Littlewood's Rule, but little is known about how decision makers actually form these decisions. We report results of an experimental study that investigates revenue management decision-making. We find that subjects' behavior is influenced by the decision type. In particular, our subjects reserve more units for the high-end segment when they are asked to set the protection level (the number of units to set aside for the higher priced class) compared to when they set the booking limit (the number of units available for the lower priced class). We propose that this behavioral pattern can be explained by our subjects’ different valuations of revenues from the high- and low-end sales. We also observe that when there is a change in segment prices, although decision makers adjust allocations in the direction suggested by normative theory, the magnitude of adjustments is greater (and hence closer to the normative level) when the source of the price change matches the class whose allocation they determine.