Revenue management for fare families with price-sensitive demand

Fare families are becoming a popular way to organize and market airline products. Typically, fare families correspond to product categories that differ by relatively more important features such as refund-ability or baggage fees while products within a family may be differentiated to a lesser degree. Organizing product offerings in this way is thought to help with better management of price-sensitive demand. We propose a way to accommodate fare families by building upon the traditional yield demand concept. Namely, we introduce a new demand component consisting of customers seeking the lowest priced product regardless of the product category and its restrictions or privileges. We discuss a plausible approach to forecast it and we show how to incorporate the new demand model in the optimization. To this end we adapt the marginal expected revenue data transformation and show, by example, comparisons with heuristic approaches that may more directly fit into the existing optimization frameworks. We discuss some extensions of the model.