Temporal Distance and Price Responsiveness: Empirical Investigation of the Cruise Industry

Abstract

Temporal distance refers to the time between purchase and consumption in advanced-sales industries. We explore how the response of aggregate demand to price changes with temporal distance in a large, proprietary dataset of Florida cruise prices, bookings, and product attributes. We offer the first evidence that cruise demand becomes more sensitive to price during the advance sales period, unlike extant findings in other settings. The results also show that demand is greatest late in the advance-sales period, providing the first finding that a late-season high-demand period coincides with a late-season increase in aggregate price sensitivity. The high-demand effect more than offsets the high-price-responsiveness pattern, leading the firm to increase prices throughout the advance-sales period. Although the data do not disentangle multiple competing explanations for the main findings, they are large enough to appear in simple data visualizations and robust enough to replicate across many model specifications, parameterizations and partitions of the data.

Keywords: Advance Sales, Cruise, Price Responsiveness, Temporal Distance, Market Differentiation, Instrumental Variables