Dupuit, Colson and the Early Days of the SNCF: the Road to Yield Management

Joachim de PAOLI * Lecturer and researcher in economics, University of Jean Moulin Lyon 3, Magellan Research Laboratory, iaelyon School of Management. Contact: joachimdp@hotmail.fr.The author would like to thank Gérard Klotz, Claire Silvant, François Vatin, Manuela Mosca, Philippe Poinsot, the members of the Magellan laboratory's Finance group, and the two anonymous referees for their comments, which helped to improve this article.

The yield management is the main method used nowadays by airlines companies in order to set their prices. It is often presented as an innovation developed in the airline sector in the United States at the end of the 1970's. However, this paper demonstrates that it has important similarities with an older theory: the pricing method of infrastructures exploited by a monopoly proposed by Jules Dupuit in 1844, developed by Clément Colson in 1890 and applied by the SNCF (French railroad company) at its creation in 1937. Indeed, yield management is based on Dupuit's idea of charging each user a price as close as possible to the use value attributed to transportion. To get users to reveal this use value, low-cost companies use an option mechanism found in Colson's developments and in the pricing system used when the SNCF was created.

In 1978, the Airline Deregulation Act introduced free competition into the air transportation industry in the United States. Low cost and charter airlines began to grow thanks to the prices they were charging, opening up markets to passengers who had mainly been using their cars or not travelling. Traditional airlines responded with a new pricing method: yield management1, which, based on capacity and demand, uses two variables:price: the goal is to charge each passenger a price that is as close as possible to the use value they place on their travel;the maximum load factor, since if the aircraft takes off without being full, the vacant seats are lost and no longer have any value.In practice, the ticket is put on sale x days before departure and an algorithm predicts the number of tickets to be sold each day – or in an even shorter time…