Fall 2008 Seminar Series

DATE: October 23, 2008
LOCATION: E40-298
TIME: 4:15pm
Reception immediately following in the ORC ConferenceRoom, E40-106

SPEAKER:
Guillermo Gallego

TITLE
Upgrades, Upsells and Pricing in Revenue Management

ABSTRACT
Capacity providers with fixed capacities often experience a mismatch between supply and demand that can be partially alleviated while improving revenues by allowing for product upgrades and upsells. We study a variety of models of increasing complexity that range from fixed prices and independent demands to models where there is price freedom and demand dependency. When prices are fixed and demands are independent, the problem is to decide which customer demands to upgrade to which products and when. We define fairness in upgrades and determine upgrade mechanisms that allow for a fair solution without loss of optimality. We also explore conditions under which a limited upgrade model will lead to no loss of optimality. Resellers of capacity have an incentive to use upgrades as a mechanism to entice customers to higher quality products with higher commission margins. We show that this practice can lead to revenues that are much larger than direct commissions from sales would indicate. Primary providers aware of this may be in a more powerful position to negotiate commissions or impose sales volume constraints. For the multinomial demand model we show that neither upgrades nor upsells can improve revenues when margins are homogenous and there is complete freedom in selecting prices. However, upgrades and upsells can improve revenues when quality consistent pricing constraints are imposed and when margins are heterogeneous.