Optimal Promises: Application of a General Framework to Airline Schedule Times

Abstract

Sellers in a wide range of industries frequently make promises about service performance (product quality) that can only be assessed after purchase. Making such a promise creates a tradeoff: A better promise (1) increases demand today, but (2) reduces the likelihood of achieving the promised performance, which reduces future demand. In this paper, we present a simple model of optimal promised performance. Using this model, we illustrate how changes in market conditions lead to changes in promised performance via their impact on one or both components of the aforementioned promise tradeoff. Lastly, we demonstrate proof of concept by applying the model to airline schedule times and their observed changes associated with market conditions, including: the availability of on-time performance data, competition, and prevalence of connecting passengers.

Keywords: Airlines, promise, performance, quality, schedule time, demand, on-time performance, expectations

JEL Classification: L15, L93, D22