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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.

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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.

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