Consequences of Dynamic Pricing in Competitive Airline Markets

Abstract

Dynamic pricing is a common tool to maximize sales in markets for perishable goods with limited capacity and stochastic demand. We look at the relationship between dynamic pricing and oligopolistic competition in the airline industry. For this purpose, we estimate the dynamic oligopoly model of dynamic pricing competition in a market with carrier exit using flight-level data. We discover that dynamic pricing results in a Pareto improvement, increasing firm profits and consumer welfare. We break down the impact into two categories: price discrimination and pricing on residual capacity (revenue management). We find that price discrimination softens competition, whereas revenue management intensifies it.

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