The hidden side of dynamic pricing in airline markets

Alderighi, Marco and Gaggero, Alberto A and Piga, Claudio A (2016): The hidden side of dynamic pricing in airline markets.

Abstract

An often disregarded, albeit central, aspect of the airline pricing's problem consists in assigning a fare to all the available seats on an airplane at the beginning of and during the whole booking period. We show how a flight's fare distribution is set in practice and how it changes over time using evidence from a leading European low-cost carrier. Such pricing behavior is consistent with the main predictions from the theoretical model we present. First, fare distributions are increasing across seats because a lower fare for the seat on sale enhances the likelihood of selling the subsequent seats. Second, over time fare distributions move, on average, downward to reflect the perishable nature of a flight's seats. Third, due to the increasing profile of the fare distributions across seats, we find that the price observed by prospective buyers tends to increase as the date of departure nears.

• Item Type: MPRA Paper
• Language: English
• Keywords: dynamic pricing, option value, seat inventory control, low-cost carriers
• Subjects: D - Microeconomics > D2 - Production and Organizations > D22 - Firm Behavior: Empirical Analysis; D - Microeconomics > D9 - Intertemporal Choice > D90 - General; L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L11 - Production, Pricing, and Market Structure ; Size Distribution of Firms

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