Organizational Structure and Pricing: Evidence from a Large U.S. Airline

Although typically modeled as a centralized firm decision, pricing often involves

multiple organizational teams that have decision rights over specific pricing inputs.

We study team input decisions using comprehensive data from a large U.S. airline.

We document that pricing at a sophisticated firm is subject to miscoordination across

teams, uses persistently biased forecasts, and does not account for cross-price elasticities.

With structural demand estimates derived from sales and search data, we find

that addressing one team’s biases in isolation has little impact on market outcomes.

We show that teams do not optimally account for biases introduced by other teams.

We estimate that corrected and coordinated inputs would lead to a significant reallocation

of capacity. Leisure consumers would benefit from lower fares, and business

customers would face significantly higher fares. Dead-weight loss would increase in

the markets studied. Finally, we discuss likely mechanisms for the observed pricing

biases.