Impact of capacity flexibility on the use of booking limits

Abstract Many firms that practice revenue management via booking limits possess a certain level of capacity flexibility, which enables them to adjust capacity in response to revealed information on demand. This paper examines how the flexibility in capacity – including upside flexibility, downside flexibility, and timing flexibility – affects the optimal booking limits for different customer segments and the benefit of using booking-limit control. We first analyze a static case where low-price customers make bookings before high-price customers, and then study a dynamic case where customers of different segments may make bookings in any order. In both cases, we find that having more upside flexibility in capacity can increase and decrease the benefit of booking-limit control, whereas having more downside flexibility always increases the benefit of booking-limit control. We also find that as the time to make capacity adjustment is postponed from the beginning to the end of the booking horizon (i.e., more timing flexibility), the optimal booking limits for lower-price segments first increase then decrease. Moreover, it is shown that the marginal values of building more upside and downside flexibility into capacity are affected by the use of booking limits.