CFDP 2103R

Dynamic Airline Pricing and Seat Availability

Author(s): 

Publication Date: August 2017

Revision Date: May 2020

Update Date: February 2018

Pages: 75

Abstract: 

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.

Keywords: 

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