Title: Fencing in the context of revenue management

Authors: Michael Zhang, Peter C. Bell

Addresses: Department of Finance and Management Science, Saint Mary’s University, 903 Robie Street, Halifax, Nova Scotia B3H 3C3, Canada. ' Richard Ivey School of Business, University of Western Ontario, 1151 Richmond Street North, London, Ontario N6A 3K7, Canada

Abstract: Tools to restrict customer migration across segments are referred to as |fences| in revenue management. However, most fences are not perfect and allow some degree of demand leakage from the high-priced market segment to the low-priced segment. In this paper, we lay out the theoretical foundation of fencing, develop the basic assumption of imperfect fences, and present an approach to modelling demand leakage among different market segments. We next propose cost functions representing the effort devoted to fences, and establish the connection between such costs and revenue gain created from market segmentation. Furthermore, we illustrate the effect of fencing using an analytical model. Specifically, we investigate the impact of fences on firms| simultaneous price and inventory decisions. We access the gain from market segmentation in the presence of imperfect fences, and show how to determine the optimal cost that should be devoted to fencing.

Keywords: fences; fencing; revenue management; market segmentation; pricing; customer migration; demand leakage; cost functions; inventories; revenue gain; analytical models.

DOI: 10.1504/IJRM.2010.030030

International Journal of Revenue Management, 2010 Vol.4 No.1, pp.42 - 68

Published online: 03 Dec 2009 *

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