Iranian Journal of Operations Research Vol. 10, No. 1, 2019, pp. 43-62 DOI: 10.29252/iors.10.1.43 Joint optimization of pricing and capacity allocation for two competitive airlines under demand uncertainty Mahdieh. Zarei 1 , Hamid. Mashreghi 2* and Saeed. Emami 3 Nowadays, airline industries should overcome different barriers regarding the fierce competition and changing consumer behavior. Thus, they attempt to focus on joint decision making which enables them to set pricing and capacity allocation to maximize their profits. In this research, we develop a model to optimize pricing and capacity allocation in a duopoly of single-flight leg for two competitive airlines. The problem considers actual assumptions about flexible partitions in flight’s cabins and additionally demand uncertainty. There is a flexible partitioning of business and economy cabins and demand is assumed price-dependent with additive uncertainty. The capacity and pricing decisions are simultaneously determined through indirect channels. Moreover, a numerical study is developed to investigate how market components and competition conditions change pricing, capacity, and profit levels. The results show that increasing market volume like decreasing price sensitivity provides higher levels of price and profits. Moreover, intensified competition never leads to higher prices. Thus, a competitive network of airlines provides better impact on market mechanism to achieve competitive prices for both economy and business classes. Keywords: Revenue management, Pricing, Capacity allocation, Competition, Airline Networks. Manuscript was received on 25/09/2018, revised on 02/03/2019 and accepted for publication on 18/05/2019. 1. Introduction In 1978, Revenue management (RM) started as an independent scholar branch by establishment of Airline Deregulation Act. This transformation originally developed when Civil Aviation Board (CAB) of United States considered the voluntary setting of pricing decisions for airlines. These new regulations, prompted rapid change and innovation in airline industry Talluri and van Ryzin [22]. After that, academic and business investigations grew dramatically through publishing research reports and papers in domain of revenue management and pricing. Over the years, RM developed for airline industry, hotel industry, car rental, and other industries which encounter with deteriorating items and demand uncertainty. The aviation industry plays a critical role in creating wealth and employment for the economy and society. Air transportation not only helps passenger’s health and logistics services but also provide basic inputs for economic activities in other sectors, such as tourism, business, investment, and supply chain management. Therefore, it is very important for the economy to reach high-quality air services at competitive expense levels Donehue and Baker [7]. 1 Department of Industrial Engineering, Babol Noshirvani University of Technology, Babol, Iran, Email: mahdieh.zarei@nit.ac.ir 2 * Corresponding Author: Department of Industrial Engineering, Babol Noshirvani University of Technology, Babol, Iran, Email: Mashreghi.h@nit.ac.ir 3 Department of Industrial Engineering, Babol Noshirvani University of Technology, Babol, Iran, Email: s_emami@nit.ac.ir Downloaded from iors.ir at 4:55 +0330 on Sunday December 5th 2021 [ DOI: 10.29252/iors.10.1.43 ]