CFDP 2103R

Dynamic Airline Pricing and Seat Availability


Publication Date: August 2017

Revision Date: May 2020

Update Date: February 2018

Pages: 75


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, L93

JEL Classification Codes: L11L12L93

See CFDP Version(s): CFDP 2103