The Welfare Effects of Dynamic Pricing: Evidence from Airline Markets
69 Pages Posted: 29 Aug 2017 Last revised: 29 Jun 2021
Date Written: June 28, 2021
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, Intertemporal price discrimination, Price discrimination, Stochastic demand, Pricing, Airlines, Dynamic discrete choice
JEL Classification: L11, L12, L93
Suggested Citation: Suggested Citation