Duopoly game of callable products in airline revenue management

•We study the capacity allocation game between duopolistic airlines which could offer callable products.•When the low-fare customers do not overflow, offering callable products is a dominant strategy and provides Pareto gains.•Offering callable products may be detrimental to the airlines.•The booking limits of the two airlines with callable products are higher than those without callable products.•We compare the booking limits under competition with those under monopoly.

This paper studies the capacity allocation game between duopolistic airlines which could offer callable products. Previous literature has shown that callable products provide a riskless source of additional revenue for a monopolistic airline. We examine the impact of the introduction of callable products on the revenues and the booking limits of duopolistic airlines. The analytical results demonstrate that, when there is no spill of low-fare customers, offering callable products is a dominant strategy of both airlines and provides Pareto gains to both airlines. When customers of both fare classes spill, offering callable products is no longer a dominant strategy and may harm the revenues of the airlines. Numerical examples demonstrate that whether the two airlines offer callable products and whether offering callable products is beneficial to the two airlines mainly depends on their loads and capacities. Specifically, when the difference between the loads of the airlines is large, the loads of the airlines play the most important role. When the difference between the loads of the airlines is small, the capacities of the airlines play the most important role. Moreover, numerical examples show that the booking limits of the two airlines in the case with callable products are always higher than those in the case without callable products.