Optimal Promises: An Examination of Airlines and Beyond
29 Pages Posted: 15 Jun 2020
Date Written: May 20, 2020
Providers in many markets make promises about the performance (quality) of a service (product) that can only be assessed after purchase. Sellers face a tradeoff whenever they provide such a promise: A better promise (1) increases demand today, but (2) reduces the likelihood of achieving the promised performance (quality) level, which reduces future demand. We present a simple model of optimal promised performance (quality), highlighting the central role of these tradeoffs. We empirically examine determinants of airline schedule times through the lens of our model. Using data on flight schedules and on-time performance (OTP) over 26 years, we examine how changes in time, competition, and prevalence of connecting passengers alter the marginal impact of schedule time and on-time performance on demand, and ultimately the schedule times (promises) airlines choose. We find that the marginal impact of schedule time on demand is less negative, and the marginal impact of OTP on demand is more negative: over time, with greater competition, and with more connecting passengers. Lastly, we show that schedule times increase over time, with greater competition, and with more connecting passengers – as our model predicts. Taken together, our analysis provides an economic rationale for observed differences in airline promises through schedule times, as well as a sensible framework that can be applied to predict and possibly respond to promises observed in airlines and potentially other markets.
Keywords: Airlines, promise, performance, quality, schedule time, demand, on-time performance, expectations
JEL Classification: L15, L93, D22
Suggested Citation: Suggested Citation