Grant: Discovery Grants Program - Individual

Market segmentation is a key strategic element in the practice of revenue management (RM). After being identified, market segments should be kept separate to prevent demand spillover from high priced segments to low priced segments and the associated revenue loss. Tools to restrict customer migration across segments are referred to as ""fences"". However, most fences are not perfect and allow some degree of demand leakage from the high-priced market segment to the low-priced segments. We propose that in the practice of RM, the firm aims at maximizing the gain generated from multiple markets, which would imply balancing the demand leakage among markets to against the cost associated with maintaining fences. Consequently, realization of the maximum gain from segmenting markets is based upon an understanding of the optimal cost to devote to fencing, or the implementation of ""optimal fences."" The long term goal of this study is to understand the strategic issue of determining optimal fences. The complexity of the problem lies in the simultaneous determination of selling price, stocking quantity and fencing decision for each market segment. However, the research in fencing has significant strategic implications in many industries as a result of advances in RM that allow firms to adjust their price and ordering quantities dynamically. This appears to be a research area of unusual promise where not much work has been done, but where there is the potential to change both the practice of management and the research agenda of management science/operation research. My study has shed light on the various problems that arise in managing fences in line with other RM decisions and provided an unusually rich source of future research. Some immediate research topics include: a) Empirical experiment to estimate the cost function of fences; b) The revenue effect caused by fences; c) The impact of buy-up behavior. d) Effect of competition; e) The problem of computing an optimal fencing strategy for multiple periods or networks.