Publication Date: August 2017
Revision Date: May 2020
Update Date: February 2018
Airfares fluctuate over time due to both demand shocks and intertemporal variation in willingness to pay. I develop and estimate a model of dynamic airline pricing accounting for both forces with new flight-level data. With the model estimates, I disentangle key interactions between the arrival pattern of consumer types and scarcity of remaining capacity due to stochastic demand. I show that dynamic airline pricing expands output by lowering fares charged to early-arriving, price-sensitive customers. It also ensures seats for late-arriving travelers with the highest willingness to pay (e.g. business travelers) who are then charged high prices. I ﬁnd that dynamic airline pricing increases total welfare relative to a more restrictive pricing regime. Finally, I show that abstracting from stochastic demand results in incorrect inferences regarding the extent to which airlines utilize intertemporal price discrimination.
Dynamic pricing, Intertemporal price discrimination, Price discrimination, Stochastic demand, Pricing, Airlines, Dynamic discrete choice
JEL Classification Codes: L11, L12, L93CFDP 2103