Perishable Good Dynamic Pricing Under Competition: An Empirical Study in the Airline Markets
50 Pages Posted: 16 Aug 2018 Last revised: 2 Jul 2019
Date Written: September 5, 2018
Dynamic pricing is increasingly popular in the perishable good markets, but its effect under competition is uncertain due to the potential for the prisoner's dilemma. I study profit and welfare implications of dynamic pricing techniques in a competitive setting. I construct a structural dynamic oligopoly model where capacitated firms compete in selling differentiated products over a finite horizon when facing demand fluctuations. I estimate the model in U.S. oligopolistic airline markets using an event of carrier exit and flight-level data. I find that (i) the ability to smooth demand fluctuations intensifies competition and benefits consumers substantially; (ii) the ability to price discriminate softens competition and allows firms to extract a substantial amount of consumer surplus.
Keywords: airline industry, dynamic pricing, dynamic oligopoly, perishable good, price discrimination, revenue management, demand uncertainty, capacity constraint
JEL Classification: D22, D25, D43, D61, L11, L13, L93
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