Publication Date: August 2022
We introduce a model of oligopoly dynamic pricing where ﬁrms with limited capacity face a sales deadline. We establish conditions under which the equilibrium is unique and converges to a system of diﬀerential equations. Using unique and comprehensive pricing and bookings data for competing U.S. airlines, we estimate our model and ﬁnd that dynamic pricing results in higher output but lower welfare than under uniform pricing. Our theoretical and empirical ﬁndings run counter to standard results in single-ﬁrm settings due to the strategic role of competitor scarcity. Pricing heuristics commonly used by airlines increase welfare relative to estimated equilibrium predictions.
Keywords: Dynamic Pricing, Dynamic Games, Revenue Management, Airlines
JEL Classification Codes: C70, C73, D21, D22, D43, D60, L13, L93