Dynamic Pricing, Advance Sales and Aggregate Demand Learning in Airlines

Abstract

This paper uses a unique U.S. airlines panel data set to empirically study the dynamic pricing of inventories with uncertain demand over a finite horizon. I estimate a dynamic pricing equation and a dynamic demand equation that jointly characterize the adjustment process between prices and sales as the flight date nears. I find that the price increases as the inventory decreases, and decreases as there is less time to sell. Consistent with aggregate demand learning and price adjustment, demand shocks have a positive and much larger effect on prices than the positive effect of anticipated sales.

Combined Effects of Capacity and Time on Fares: Insights from the Yield Management of a Low-Cost Airline

“…Using the same data, Escobari (2012) confirms that, holding inventories constant, fares decrease until about 14 days from departure and subsequently increase. The declining profile is consistent with the theoretical model in Gallego and van Ryzin (1994), where the option value of waiting for the arrival of a customer with a high willingness-to-pay falls as the departure date approaches.…”

Dynamic Oligopoly Pricing: Evidence from the Airline Industry

“…In contrast, McAfee and Te Velde (2007), Gaggero and Piga (2011), Escobari (2012), and Escobari, Rupp and Meskey (2013) have access to competitive price data, but are interested in the determinants of price levels and dispersion rather than pricing dynamics and their determinants. 1 departure.…”

“…At a methodological level, our reduced form identification approach is more closely related to Escobari (2012), who explores how prices adjust to demand shocks, and to Escobari, Rupp and Meskey (2013), who study pricediscrimination between bookings in business hours versus bookings in the evening. To the best of our knowledge, this is the first paper which investigates empirically how (and why) pricing dynamics vary with the competitive environment.…”

Demand Estimation with Availability Variation

“…For capacity-constrained perishable goods that can be sold well in advance, such as event tickets, demand can be a function of time until the expiration of the good (e.g., Escobari (2012) and Lazarev (2013)). Such products can also become available all at once, which can, in combination with evident underpricing in some markets, generate competition among consumers to purchase before capacity constraints bind in a primary market (e.g., Leslie and Sorensen (2014) and Sweeting (2012)).…”