The Welfare Effects of Dynamic Pricing: Evidence from Airline Markets

69 Pages Posted: 29 Aug 2017 Last revised: 29 Jun 2021

See all articles by Kevin Williams

Kevin Williams

Yale School of Management; Yale University - Cowles Foundation

Multiple version iconThere are 3 versions of this paper

Date Written: June 28, 2021

Abstract

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

Williams, Kevin, The Welfare Effects of Dynamic Pricing: Evidence from Airline Markets (June 28, 2021). Cowles Foundation Discussion Paper No. 2103, Available at SSRN: https://ssrn.com/abstract=3026383 or http://dx.doi.org/10.2139/ssrn.3026383

Kevin Williams (Contact Author)

Yale School of Management ( email )

New Haven, CT 06520
United States

HOME PAGE: http://som.yale.edu

Yale University - Cowles Foundation ( email )

Box 208281
New Haven, CT 06520-8281
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
813
Abstract Views
2,878
rank
17,870
PlumX Metrics