A cooperative game theory framework for revenue management in transport and logistics service providers

Paper in proceeding, 2011

Purpose of this paper Revenue management has been vastly used in different modes of passenger and freight transport industry, especially airlines, as a tool for revenue maximization and allocation of service capacity to different groups of customers. However, traditional revenue management models are not sufficient to study interactions such as competition or cooperation within the market among transport service providers. The aim of this paper is to construct a framework for the analysis of the cooperations between agents of transport/logistics service providers, each of which dealing with different classes of customers. Design/methodology/approach This paper studies a static capacity allocation problem in revenue management through two cooperative games where the players are agents who sell the same transport/logistics service to different classes of customers of different profitability. It analyzes characteristics of those games through six propositions. Findings This research shows that agents will not cooperate voluntarily only by the incentive of revenue. The results also suggest a fair method to share revenue among agents in the case they are owned by the same company or any other case where they have no choice but cooperation. However, the paper shows that the total revenue gained from the coalition of all agents can be shared fairly among them. Research limitations/implications (if applicable) Further study of the cases where demand probability distributions change under coalitions is recommended. Combining pricing and capacity allocation decisions and studying other resource sharing rules in bankruptcy games and their applicability in practice are also desirable fields of generalization. Practical implications (if applicable) The results can be applied to cases of mergers, acquisition and coalition of transport/logistic service providers. Furthermore, the results can be employed to find negotiable and fair ways of sharing extra revenue generated by cooperation. What is original/value of paper Former game theory models of revenue management either were non-cooperative or in the case they were cooperative, they studied cooperations between firms who deal with a range of classes. However, this paper defines players as the agents who are in charge of classes of customers or in other words, the classes of customers themselves.