Role of exchangeable tickets in the optimal menu design for airline tickets

While menus are offered pervasively in the airline industry, the nature of the menu design remains unclear. For example, the menu offerings differ substantially across companies and across different air routes within the same company. To have a better understanding in the menu offerings, we build a stylized model to examine a monopolistic seller’s optimal menu design with three types of tickets: refundable, nonrefundable, and exchangeable tickets. The role of exchangeable tickets is of particular interest as it is less explored in the academic literature, but is prevalent in practice. We show that for the seller, the exchangeable ticket is inherently more profitable than the other two types of tickets; thus, it is an indispensable element of the optimal menu. On the other hand, increasing the flexibility of exchangeable tickets may dampen the seller’s profitability. The analysis also reveals that cancellation fees are used as instruments to adjust the differences between consumers’ willingness to pay, and when they are adopted, the seller has less incentive to sell nonrefundable tickets.