Working Paper: NBER ID: w30347
Authors: Jose M. Betancourt; Ali Hortasu; Aniko Oery; Kevin R. Williams
Abstract: We introduce a model of dynamic pricing in perishable goods markets with competition and provide conditions for equilibrium uniqueness. Pricing dynamics are rich because both own and competitor scarcity affect future profits. We identify new competitive forces that can lead to misallocation due to selling units too quickly: the Bertrand scarcity trap. We empirically estimate our model using daily prices and bookings for competing U.S. airlines. We compare competitive equilibrium outcomes to those where firms use pricing heuristics based on observed internal pricing rules at a large airline. We find that pricing heuristics increase revenues (4-5%) and consumer surplus (3%).
Keywords: dynamic pricing; airline markets; competition; consumer surplus; revenue
JEL Codes: C70; C73; D21; D22; D43; D60; L13; L93
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| dynamic pricing competition (D49) | misallocation of resources (D61) |
| dynamic pricing (D49) | bertrand scarcity trap (D43) |
| low prices early on (P22) | overabundance of bookings (Z30) |
| low prices early on (P22) | shortage of bookings as departure approaches (Z30) |
| utilizing pricing heuristics (D40) | increase in revenues (H27) |
| utilizing pricing heuristics (D40) | increase in consumer surplus (D11) |
| adoption of heuristics (C92) | alleviates bertrand scarcity trap (D43) |