Speaker: Professor Yinyu Ye (Stanford University)

Inviter: Center of Optimization and Applications

Time: September 1 (Thursday), 10:30-11:30

Venue: Room 311

Topic: Hidden-City Ticketing: the Cause, Cost and Impact

Abstract: Hidden-city ticket is an interesting phenomenon existing in airline ticket
pricing. It occurs when an itinerary with a connection city is cheaper than a ticket
from the origin to the connection point. In such a case, a passenger traveling to the
connection city will have the incentive to pretend to be traveling to the final 
destination, deplane at the connection point and throw away the rest of the ticket.
Hidden-city ticketing opportunities are not uncommon nowadays. In this paper, we 
establish a quantitative model to analyze hidden-city ticketing and its impact on both
airlines revenues and consumers welfare. We first show that this phenomenon arises 
when there is a large difference in price elasticity on related itineraries. Then we 
build a dynamic programming model for the airlines that takes into account the hidden-city
opportunities which are fully taken by passengers. Under this model, the optimal
pricing reaction of the airlines is to eliminate such opportunities, but the airlines
revenues will always decrease.  We show that the decrease could be as much as half of
the original optimal revenue when the passengers do not use hidden-city ticketing but
not more. Meanwhile, as a reaction of the airlines towards such ticketing practice, 
the fares to the final destination of a hidden-city itinerary will increase, which 
eventually will hurt the passengers. We first take an exogenous competition model in 
our analysis and then validate it through a game theoretic approach. Numerical results 
are presented to illustrate our results.