Organizational Structure and Pricing: Evidence from a Large U.S. Airline

Cowles Foundation Discussion Paper No. 2312R, 2022

66 Pages Posted: 1 Jun 2022

See all articles by Ali Hortaçsu

Ali Hortaçsu

University of Chicago; National Bureau of Economic Research (NBER)

Olivia Natan

University of California Berkeley

Hayden Parsley

The University of Texas at Austin

Timothy Schwieg

University of Chicago - Department of Economics

Kevin Williams

Yale School of Management; Yale University - Cowles Foundation

Multiple version iconThere are 4 versions of this paper

Date Written: March 21, 2022

Abstract

Although typically modeled as a centralized firm decision, pricing often involves multiple organizational teams that have decision rights over specific pricing inputs. We study team input decisions using comprehensive data from a large U.S. airline. We document that pricing at a sophisticated firm is subject to miscoordination across teams, uses persistently biased forecasts, and does not account for cross-price elasticities. With structural demand estimates derived from sales and search data, we find that addressing one team’s biases in isolation has little impact on market outcomes. We show that teams do not optimally account for biases introduced by other teams. We estimate that corrected and coordinated inputs would lead to a significant reallocation of capacity. Leisure consumers would benefit from lower fares, and business customers would face significantly higher fares. Dead-weight loss would increase in the markets studied. Finally, we discuss likely mechanisms for the observed pricing biases.

Keywords: Pricing, organizational structure, revenue management, pricing frictions, behavioral IO

JEL Classification: C11, C53, D22, D42, L10, L93

Suggested Citation

Hortaçsu, Ali and Natan, Olivia and Parsley, Hayden and Schwieg, Timothy and Williams, Kevin, Organizational Structure and Pricing: Evidence from a Large U.S. Airline (March 21, 2022). Cowles Foundation Discussion Paper No. 2312R, 2022, Available at SSRN: https://ssrn.com/abstract=4063127 or http://dx.doi.org/10.2139/ssrn.4063127

Ali Hortaçsu

University of Chicago ( email )

1101 East 58th Street
Chicago, IL 60637
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Olivia Natan

University of California Berkeley

CA
United States

Hayden Parsley

The University of Texas at Austin ( email )

United States

Timothy Schwieg

University of Chicago - Department of Economics ( email )

1101 East 58th Street
Chicago, IL 60637
United States

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

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