Working Paper: NBER ID: w29508
Authors: Ali Hortasu; Olivia R. Natan; Hayden Parsley; Timothy Schwieg; Kevin R. Williams
Abstract: Firms facing complex objectives often decompose the problems they face, delegating different parts of the decision to distinct sub-units. Using comprehensive data and internal models from a large U.S. airline, we establish that airline pricing is not well approximated by a model of the firm as a unitary decision-maker. We show that observed prices, however, can be rationalized by accounting for organizational structure and for the decisions by departments that are tasked with supplying inputs to the observed pricing heuristic. Simulating the prices the firm would charge if it were a rational, unitary decision-maker results in lower welfare than we estimate under observed practices. Finally, we discuss why counterfactual estimates of welfare and market power may be biased if prices are set through decomposition, but we instead assume that they are set by unitary decision-makers.
Keywords: organizational structure; pricing heuristics; airline industry; welfare analysis
JEL Codes: C11; C53; D22; L11; L93
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Departmental decisions (network planning, pricing, revenue management) (D49) | Pricing heuristic (D49) |
| Pricing heuristic (D49) | Observed prices (P22) |
| Departmental decisions (network planning, pricing, revenue management) (D49) | Observed prices (P22) |
| Organizational structure (L22) | Pricing outcomes (L11) |
| Observed prices (P22) | Welfare losses (D69) |
| Unitary decision-maker model (D79) | Simulated prices (P22) |