Design and Control of Incompletely Specified Products

• Applicant: Professor Dr. Jochen Gönsch
• Subject Area: Operations Management and Computer Science for Business Administration
• Term: since 2021
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 457702270

Many industries from retail to travel increasingly use a new selling strategy that is based on reducing waste – be it otherwise unused airplane seats or discarded groceries. The customer of a so-called in-completely specified product (ICSP) buys a menu of alternatives. After the purchase, the firm assigns her an alternative. Examples are the widely-known upgrades as well as more recent innovations. Consider “Blind Booking” by Germanwings: Customers choose departure airport and day along with a theme (like “Beach and Sun”). Destination and departure time are chosen by the airline. This has two major advantages for the airline:1) Due to their inherent uncertainty, ICSPs offer an entirely new dimension for customer segmentation, namely strength of customer preferences. Whereas a price-sensitive leisure customer may buy “Blind Booking” to get to the beach, it is hard to imagine a business traveler going to an arbitrary town. 2) If the firm assigns the alternative some time after the purchase, it may benefit from additional flexibility because uncertainty regarding demand is usually smaller at this later point in time.Although the revenue share of ICSPs is often small, it is important to note that their additional revenue is associated with negligible costs. Analogous to the indispensable traditional revenue management, the key idea is to better use existing capacities. Thus, the impact on profits is considerable.Currently, ICSPs gain additional relevance from the COVID-19 crisis. In the travel industry, the traditional price differentiation based on advance booking is merely applicable because few customers book in advance. Additionally, most airlines actually offer solely ICSPs. Although they pretend to sell specific flights, advance sales are based on a pre-Corona schedule that is already known to drastically shrink close to departure.Strategic operations management strives to theoretically explain ICSPs’ existence and derive recommendations for their design (e.g. alternatives to include, pricing). However, customers with a simplified preference structure are assumed. An important consequence is that optimal ICSPs consist of only two alternatives, which are selected with equal probabilities by the firm. By contrast, more complex ICSPs are prevalent in practice. In revenue management, which controls operational sales processes (e.g. availability, assignment of alternatives), the consideration of ICSPs’ flexibility is still limited.The proposed project will first focus the design of ICSPs. In particular, it will evaluate whether more general customer preferences can explain the prevalence of ICSPs with more than two alternatives in practice. This is also the basis for the analysis of customizable ICSPs (so-called variable opaque products).Next, revenue management approaches will be tackled. Here, a framework analogous to the state-of-the-art one for choice-based revenue management will be developed.

• DFG Programme: Research Grants