HA 1174 Microeconomics
Yield management is the process of understanding, anticipating and influencing consumer behavior in order to maximize revenue. Yield Management is applied to products that have fixed capacity, predictable demand, perishable inventory, variable demand, and accommodating price structure. Hotel rooms and airline seats are all examples of perishable goods. The challenge is to sell the right resources to the right customer at the right time for the right price.
Theory of Consumer Behavior
A firm can maximize revenue if it is able to manipulate the supply and demand behavior of the consumer. The theory of consumer behavior states consumers are constrained by budgets among other things. Firms use strategies such promotions to attract customers that wouldn’t normally buy a good such as a room at a four-star hotel. By selling a product at discounted prices to the consumers willing to take the time to search for discounts, coupons, and rebates, they can add a new customer base to their hotel. The hotel is then able to sell their rooms at a higher price to those consumers who do not possess the time or don’t need to find a cheaper rate. Therefore, the hotel would be able to produce more revenue, adding the customer base that is on a tighter budget to their established, less fiscally conservative clientele.
Marginal Revenue v. marginal Costs
Marginal revenue and marginal cost are used to calculate the marginal value (mr - mc). Yield management calls for the firm to not necessarily sell 100% of its product, but rather sell as much of the product for as high of a price at certain times.
One example of this is forecasting blocks of marginal value. Hotel owners do this to know when to reject booking based on the marginal value. For example, hotel owners want their occupancy to be less varible. By encouraging guests to book for extended periods, they are able to better manage their occupancy and therefore yield. This leads to a...