Option-based dynamic pricing on airline

Dynamic pricing has been one of the major research areas of revenue management. This paper provided a novel dynamic pricing method based on option and showed how an airline may be considered as the holder of a financial option on tickets. In a fully competitive market, a partial differential equation model was used to describe the financial aspects of the price of tickets and the partial differential equations were established for the call and put option price. Based on the new method, the tickets´ price has been decided using finite difference method; the amount of tickets sold has been calculated using an integral linear programming. Such a pricing model was much better than the method that didn´t take option into consideration.