Publication Type
Journal Article
Version
acceptedVersion
Publication Date
4-2021
Abstract
We study a novel newsvendor-type problem where the information on demand quantity is not exogenously given. The customer needs to make the booking decision based on her estimation on demand, which is affected by the value of shortage penalty cost. The problem is motivated by low-cost airline service practices where passengers need to book baggage allowance for their travel. The baggage overweight price affects the accuracy of passengers’ baggage weight estimation and thus their booking quantities. Through stochastic decision models, we analytically characterize the impact of shortage penalty cost on passengers’ booking decisions as well as airline’s profit. We consider various modeling settings, including a system with multiple passengers and a system where passengers have stochastic inconvenience costs on not-carrying overweight baggage. The results and insights from our study provide guidelines for firms to set their optimal penalty prices.
Keywords
Airline baggage, Weight estimation, Shortage cost, Booking allowance
Discipline
Operations and Supply Chain Management | Transportation
Research Areas
Operations Management
Publication
Production and Operations Management
Volume
30
Issue
6
First Page
1603
Last Page
1614
ISSN
1059-1478
Identifier
10.1111/poms.13297
Publisher
INFORMS
Embargo Period
10-1-2022
Citation
ZHANG, Jianghua; LONG, Daniel Zhuoyu; WANG, Rowan; and XIE, Chi.
Impact of penalty cost on customers' booking decisions. (2021). Production and Operations Management. 30, (6), 1603-1614.
Available at: https://ink.library.smu.edu.sg/lkcsb_research/6681
Copyright Owner and License
Authors
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.
Additional URL
https://doi.org/10.1111/poms.13297