Working Paper: NBER ID: w28989
Authors: Kevin R. Williams
Abstract: Airfares fluctuate due to demand shocks and intertemporal variation in willingness to pay. I estimate a model of dynamic airline pricing accounting for both sources of price adjustments using novel flight-level data. I use the model estimates to evaluate the welfare effects of dynamic airline pricing. Relative to uniform pricing, dynamic pricing benefits early-arriving, leisure consumers at the expense of late-arriving, business travelers. Although dynamic pricing ensures seat availability for business travelers, these consumers are then charged higher prices. When aggregated over markets, welfare is higher under dynamic pricing than under uniform pricing. The directionality of the welfare effect at the market level depends on whether dynamic price adjustments are mainly driven by demand shocks or by changes in the overall demand elasticity.
Keywords: dynamic pricing; airline markets; welfare effects; price discrimination
JEL Codes: L11; L12; L93
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| dynamic pricing (D49) | welfare effects (D69) |
| dynamic pricing (D49) | benefits early-arriving leisure consumers (D16) |
| dynamic pricing (D49) | disadvantages late-arriving business travelers (R41) |
| dynamic pricing (D49) | total consumer welfare (D69) |
| dynamic pricing (D49) | total welfare (D69) |
| price adjustments driven by demand shocks (E39) | welfare effects (D69) |
| price adjustments driven by willingness to pay (D40) | welfare effects (D69) |
| dynamic pricing (D49) | output expansion (E23) |
| dynamic pricing (D49) | seat availability for business travelers (L93) |
| intertemporal price discrimination (D15) | revenue gains (H27) |