Nothing Special   »   [go: up one dir, main page]
IDEAS home Printed from https://ideas.repec.org/p/cwl/cwldpp/2103.html
   My bibliography  Save this paper

Dynamic Airline Pricing and Seat Availability

Author

Abstract
Airfares are determined by both intertemporal price discrimination and dynamic adjustment to stochastic demand. I estimate a model of dynamic airline pricing accounting for both forces with new flight-level data. With model estimates, I disentangle key interactions between the arrival pattern of consumer types and remaining capacity under stochastic demand. I show that the forces are complements in airline markets and lead to significantly higher revenues, as well as increased consumer surplus, compared to a more restrictive pricing regime. Finally, I show that abstracting from stochastic demand leads to a systematic bias in estimating demand elasticities.

Suggested Citation

  • Kevin R. Williams, 2017. "Dynamic Airline Pricing and Seat Availability," Cowles Foundation Discussion Papers 2103, Cowles Foundation for Research in Economics, Yale University.
    • Handle: RePEc:cwl:cwldpp:2103
    as

    Download full text from publisher

    File URL: https://cowles.yale.edu/sites/default/files/files/pub/d21/d2103u.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Rust, John, 1987. "Optimal Replacement of GMC Bus Engines: An Empirical Model of Harold Zurcher," Econometrica, Econometric Society, vol. 55(5), pages 999-1033, September.
    2. Patrick Bajari & C. Lanier Benkard & Jonathan Levin, 2007. "Estimating Dynamic Models of Imperfect Competition," Econometrica, Econometric Society, vol. 75(5), pages 1331-1370, September.
    3. Guillermo Gallego & Garrett van Ryzin, 1994. "Optimal Dynamic Pricing of Inventories with Stochastic Demand over Finite Horizons," Management Science, INFORMS, vol. 40(8), pages 999-1020, August.
    4. V. Joseph Hotz & Robert A. Miller, 1993. "Conditional Choice Probabilities and the Estimation of Dynamic Models," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 60(3), pages 497-529.
    5. B. Peter Pashigian & Brian Bowen, 1991. "Why Are Products Sold on Sale?: Explanations of Pricing Regularities," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 106(4), pages 1015-1038.
    6. Kalyan Talluri & Garrett van Ryzin, 2004. "Revenue Management Under a General Discrete Choice Model of Consumer Behavior," Management Science, INFORMS, vol. 50(1), pages 15-33, January.
    7. Austan Goolsbee & Chad Syverson, 2008. "How Do Incumbents Respond to the Threat of Entry? Evidence from the Major Airlines," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 123(4), pages 1611-1633.
    8. Harikesh Nair, 2007. "Intertemporal price discrimination with forward-looking consumers: Application to the US market for console video-games," Quantitative Marketing and Economics (QME), Springer, vol. 5(3), pages 239-292, September.
    9. Steven Berry & Panle Jia, 2010. "Tracing the Woes: An Empirical Analysis of the Airline Industry," American Economic Journal: Microeconomics, American Economic Association, vol. 2(3), pages 1-43, August.
    10. Pascal Courty & Mario Pagliero, 2012. "The Impact of Price Discrimination on Revenue: Evidence from the Concert Industry," The Review of Economics and Statistics, MIT Press, vol. 94(1), pages 359-369, February.
    11. James D. Dana Jr. & Kevin R. Williams, 2018. "Oligopoly Price Discrimination: The Role of Inventory Controls," Cowles Foundation Discussion Papers 2136R, Cowles Foundation for Research in Economics, Yale University, revised Sep 2018.
    12. Gale, Ian L & Holmes, Thomas J, 1993. "Advance-Purchase Discounts and Monopoly Allocation of Capacity," American Economic Review, American Economic Association, vol. 83(1), pages 135-146, March.
    13. Phillip Leslie, 2004. "Price Discrimination in Broadway Theater," RAND Journal of Economics, The RAND Corporation, vol. 35(3), pages 520-541, Autumn.
    14. Gustavo Vulcano & Garrett van Ryzin & Wassim Chaar, 2010. "OM Practice--Choice-Based Revenue Management: An Empirical Study of Estimation and Optimization," Manufacturing & Service Operations Management, INFORMS, vol. 12(3), pages 371-392, February.
    15. Marco Alderighi & Marcella Nicolini & Claudio A. Piga, 2015. "Combined Effects of Capacity and Time on Fares: Insights from the Yield Management of a Low-Cost Airline," The Review of Economics and Statistics, MIT Press, vol. 97(4), pages 900-915, October.
    16. Clark, Robert & Vincent, Nicolas, 2012. "Capacity-contingent pricing and competition in the airline industry," Journal of Air Transport Management, Elsevier, vol. 24(C), pages 7-11.
    17. James D. Dana Jr., 1999. "Using Yield Management to Shift Demand When the Peak Time is Unknown," RAND Journal of Economics, The RAND Corporation, vol. 30(3), pages 456-474, Autumn.
    18. Jun Li & Nelson Granados & Serguei Netessine, 2014. "Are Consumers Strategic? Structural Estimation from the Air-Travel Industry," Management Science, INFORMS, vol. 60(9), pages 2114-2137, September.
    19. Wedad Elmaghraby & P{i}nar Keskinocak, 2003. "Dynamic Pricing in the Presence of Inventory Considerations: Research Overview, Current Practices, and Future Directions," Management Science, INFORMS, vol. 49(10), pages 1287-1309, October.
    20. Diego Escobari, 2012. "Dynamic Pricing, Advance Sales and Aggregate Demand Learning in Airlines," Journal of Industrial Economics, Wiley Blackwell, vol. 60(4), pages 697-724, December.
    21. Xuanming Su, 2007. "Intertemporal Pricing with Strategic Customer Behavior," Management Science, INFORMS, vol. 53(5), pages 726-741, May.
    22. Anja Lambrecht & Katja Seim & Naufel Vilcassim & Amar Cheema & Yuxin Chen & Gregory Crawford & Kartik Hosanagar & Raghuram Iyengar & Oded Koenigsberg & Robin Lee & Eugenio Miravete & Ozge Sahin, 2012. "Price discrimination in service industries," Marketing Letters, Springer, vol. 23(2), pages 423-438, June.
    23. Andrew Sweeting, 2012. "Dynamic Pricing Behavior in Perishable Goods Markets: Evidence from Secondary Markets for Major League Baseball Tickets," Journal of Political Economy, University of Chicago Press, vol. 120(6), pages 1133-1172.
    24. James D. Dana Jr. & Kevin R. Williams, 2018. "Oligopoly Price Discrimination: The Role of Inventory Controls," Cowles Foundation Discussion Papers 2136, Cowles Foundation for Research in Economics, Yale University.
    25. Kristopher S. Gerardi & Adam Hale Shapiro, 2009. "Does Competition Reduce Price Dispersion? New Evidence from the Airline Industry," Journal of Political Economy, University of Chicago Press, vol. 117(1), pages 1-37, February.
    26. Gonca P. Soysal & Lakshman Krishnamurthi, 2012. "Demand Dynamics in the Seasonal Goods Industry: An Empirical Analysis," Marketing Science, INFORMS, vol. 31(2), pages 293-316, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Scott M. Kaplan, 2022. "Putting a price on popularity: Evidence from superstars in the National Basketball Association," Economic Inquiry, Western Economic Association International, vol. 60(3), pages 1357-1381, July.
    2. James D. Dana & Daniel J. Greenfield, 2019. "The Impact of Passenger Mix on Load Factors in the Airline Industry," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 54(1), pages 111-127, February.
    3. Alderighi, Marco & Gaggero, Alberto A. & Piga, Claudio A., 2022. "Hidden prices with fixed inventory: Evidence from the airline industry," Transportation Research Part B: Methodological, Elsevier, vol. 157(C), pages 42-61.
    4. Siegert, Caspar & Ulbricht, Robert, 2020. "Dynamic oligopoly pricing: Evidence from the airline industry," International Journal of Industrial Organization, Elsevier, vol. 71(C).
    5. Giulio Giorgione & Francesco Ciari & Francesco Viti, 2020. "Dynamic Pricing on Round-Trip Carsharing Services: Travel Behavior and Equity Impact Analysis through an Agent-Based Simulation," Sustainability, MDPI, vol. 12(17), pages 1-23, August.
    6. Ambarish Chandra, 2020. "Price Discrimination along Multiple Dimensions: New Evidence from a Regional Airline," Working Papers tecipa-676, University of Toronto, Department of Economics.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Kevin R. Williams, 2017. "Dynamic Airline Pricing and Seat Availability," Cowles Foundation Discussion Papers 2103R, Cowles Foundation for Research in Economics, Yale University, revised May 2020.
    2. Kevin R. Williams, 2017. "The Welfare Effects of Dynamic Pricing: Evidence from Airline Markets," Cowles Foundation Discussion Papers 2103R2, Cowles Foundation for Research in Economics, Yale University, revised Jun 2021.
    3. Kevin R. Williams, 2022. "The Welfare Effects of Dynamic Pricing: Evidence From Airline Markets," Econometrica, Econometric Society, vol. 90(2), pages 831-858, March.
    4. Alderighi, Marco & Gaggero, Alberto A. & Piga, Claudio A., 2022. "Hidden prices with fixed inventory: Evidence from the airline industry," Transportation Research Part B: Methodological, Elsevier, vol. 157(C), pages 42-61.
    5. Siegert, Caspar & Ulbricht, Robert, 2020. "Dynamic oligopoly pricing: Evidence from the airline industry," International Journal of Industrial Organization, Elsevier, vol. 71(C).
    6. Diego Escobari & Nicholas G. Rupp & Joseph Meskey, 2019. "An Analysis of Dynamic Price Discrimination in Airlines," Southern Economic Journal, John Wiley & Sons, vol. 85(3), pages 639-662, January.
    7. Yannis Kerkemezos & Bas Karreman, 2020. "On the Benefits of Being Alone: Scheduling Changes, Intensity of Competition and Dynamic Airline Pricing," Tinbergen Institute Discussion Papers 20-042/VII, Tinbergen Institute.
    8. Escobari, Diego & Rupp, Nicholas & Meskey, Joseph, 2018. "Dynamic Price Discrimination in Airlines," MPRA Paper 88078, University Library of Munich, Germany.
    9. Gonca P. Soysal & Lakshman Krishnamurthi, 2012. "Demand Dynamics in the Seasonal Goods Industry: An Empirical Analysis," Marketing Science, INFORMS, vol. 31(2), pages 293-316, March.
    10. Ambarish Chandra, 2020. "Price Discrimination along Multiple Dimensions: New Evidence from a Regional Airline," Working Papers tecipa-676, University of Toronto, Department of Economics.
    11. Diego Escobari, 2012. "Dynamic Pricing, Advance Sales and Aggregate Demand Learning in Airlines," Journal of Industrial Economics, Wiley Blackwell, vol. 60(4), pages 697-724, December.
    12. Diego Escobari & Cristhian Mellado, 2014. "The Choice of Airport, Airline, and Departure Date and Time: Estimating the Demand for Flights," Advances in Airline Economics, in: The Economics of International Airline Transport, volume 4, pages 177-198, Emerald Group Publishing Limited.
    13. Diego Escobari & Manuel A. Hernandez, 2019. "Separating Between Unobserved Consumer Types: Evidence From Airlines," Economic Inquiry, Western Economic Association International, vol. 57(2), pages 1215-1230, April.
    14. Ken Moon & Kostas Bimpikis & Haim Mendelson, 2018. "Randomized Markdowns and Online Monitoring," Management Science, INFORMS, vol. 64(3), pages 1271-1290, March.
    15. Yao Cui & A. Yeşim Orhun & Izak Duenyas, 2019. "How Price Dispersion Changes When Upgrades Are Introduced: Theory and Empirical Evidence from the Airline Industry," Management Science, INFORMS, vol. 65(8), pages 3835-3852, August.
    16. Benny Mantin & Eran Rubin, 2016. "Fare Prediction Websites and Transaction Prices: Empirical Evidence from the Airline Industry," Marketing Science, INFORMS, vol. 35(4), pages 640-655, July.
    17. Escobari, Diego, 2014. "Estimating dynamic demand for airlines," Economics Letters, Elsevier, vol. 124(1), pages 26-29.
    18. Melis, Giuseppe & Piga, Claudio A, 2016. "Are all online hotel prices created dynamic? An empirical assessment," MPRA Paper 75896, University Library of Munich, Germany.
    19. Mingyu Joo & Dinesh K. Gauri & Kenneth C. Wilbur, 2020. "Temporal Distance and Price Responsiveness: Empirical Investigation of the Cruise Industry," Management Science, INFORMS, vol. 66(11), pages 5362-5388, November.
    20. Chiou, Yu-Chiun & Liu, Chia-Hsin, 2016. "Advance purchase behaviors of air passengers: A continuous logit model," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 93(C), pages 474-484.

    More about this item

    Keywords

    Dynamic pricing; Intertemporal price discrimination; Price discrimination; Stochastic demand; Pricing; Airlines; Dynamic discrete choice;
    All these keywords.

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • L93 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Air Transportation

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cwl:cwldpp:2103. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Brittany Ladd (email available below). General contact details of provider: https://edirc.repec.org/data/cowleus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.