Customer-Behavior and Market-Response Models

Abstract

This chapter reviews the basic theory of consumer choice, aggregate demand, and the operational, market-response models that are used in both quantity-and price-based revenue management. Because demand results from many individuals making choice decisions-choices to buy one firm's products over another, to wait or not to buy at all, to buy more or fewer units-we begin by looking at models of individual-choice behavior. When added up, these individual purchase decisions determine aggregate demand, so we next discuss aggregate-demand functions and their properties. Our treatment of the theory is somewhat abbreviated , aimed more at developing an intuitive and practical understanding of the concepts. The Notes and Sources section at the end of the chapter provides references that offer more extensive treatment of consumer behavior theory. Appendix E at the end of the book provides a basic reference on consumer theory, including utility theory, reservation prices, and risk preferences. 7.1 The Independent-Demand Model Before delving into more complex models of demand, we first briefly review the independent-demand models which is the basis of much of the material in Chapters 2 and 3 on quantity-based RM. This model is rather simple: it assumes that demand for each product is an independent stochastic process, not influenced by the firm's availabihty controls. Further, as we have seen in Section 2.2, static models of quantity-based RM also assume that the demand for products arrives in a specified order over the booking period, with demand for the lower-priced products appearing first. Thus, the independent model does not endogenize customer behavior, neither choice behavior nor purchase-timing behavior.