Testing Theories of Scarcity Pricing in the Airline Industry

Abstract

This paper investigates why passengers pay substantially different fares for travel on the same airline between the same two airports. We investigate questions that are fundamentally different from those in the existing literature on airline price dispersion. We use a unique new dataset to test between two broad classes of theories regarding airline pricing. The first group of theories, as advanced by Dana (1999b) and Gale and Holmes (1993), postulates that airlines practice scarcity based pricing and predicts that variation in ticket prices is driven by differences between high demand and low demand periods. The second group of theories is that airlines practice price discrimination by using ticketing restrictions to segment customers by willingness to pay. We use a unique dataset, a census of ticket transactions from one of the major computer reservation systems, to study the relationships between fares, ticket characteristics, and flight load factors. The central advantage of our dataset is that it contains variables not previously available that permit a test of these theories. We find only mixed support for the scarcity pricing theories. Flights during high demand periods have slightly higher fares but exhibit no more fare dispersion than flights where demand is low. Moreover, the fraction of discounted advance purchase seats is only slightly higher on off-peak flights. However, ticket characteristics that are associated with second-degree price discrimination drive much of the variation in ticket pricing.

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

“…First, the evidence reported in Figure 3 suggests that YM techniques designed by airlines to manage capacity constitute an important factor driving fares' dispersion. Interestingly, despite the methodological similarity, Puller et al (2009) reach an opposite conclusion in their study of U.S. airline markets. 12 Second, it introduces the need to combine capacity concerns with at least two other aspects of YM: 1) the fares' temporal profile, i.e., the possibility that fares may change regardless of the flight's occupancy rate and 2) the discretional intervention of an yield manager to tackle unexpected contingencies.…”

“…However, a more complex fares' dynamics consistent with a combined use of both CS and APD is also found over the entire booking period we take into consideration: in the two months preceding departure the intertemporal profile of a standard flight's fares often appears to be U-shaped, especially in flights that fill up well in advance of departure. While the existing 4 literature has already identified that fares generally tend to increase as the departure date nears (Bilotkach et al, 2010;Puller et al, 2009), to our knowledge no previous contribution has illustrated a U-shaped temporal profile of fares.…”

“…On the one hand, Puller et al (2009) find only modest support for the capacity-driven approach, and illustrate that much of the fare variation may be associated with second-degree price discrimination (i.e. ticket characteristics).…”

“…They also provide a useful guide for the specification of the econometric model and the interpretation of its findings. To generalize the evidence from one route to the entire sample, in Figure 3 we follow the approach used in Puller et al (2009). We first calculate, for each flight-code/booking day combination, the mean value of both Fare1 and Sold Seats in a given month; then, we derive the percentage deviation of each daily observation from each respective mean value.…”

“…Given the parallel movement that both effects induce on fares, studying one without the other is likely to bias the analysis. Furthermore, the joint investigation of both properties sheds lights on the relative importance of two classes of theoretical airline pricing models, one emphasizing a capacity-driven motivation, the other focussing on intertemporal price discrimination and customers' segmentation (Alderighi, 2010;Puller et al, 2009). …”