CFDP 2312R2

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

Author(s): 

Publication Date: November 2021

Revision Date: March 2022October 2022

Pages: 66

Abstract: 

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.

Keywords: Pricing, Organizational Structure, Revenue Management, Behavioral IO

JEL Classification Codes: C11, C53, D22, D42, L10, L93

JEL Classification Codes: C11C53D22D42L10L93

See CFDP Version(s): CFDP 2312
PDF: 
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