DYNAMIC AIRLINE PRICING AND SEAT AVAILABILITY By Kevin R. Williams August 2017 Revised May 2020 COWLES FOUNDATION DISCUSSION PAPER NO. 2103R COWLES FOUNDATION FOR RESEARCH IN ECONOMICS YALE UNIVERSITY Box 208281 New Haven, Connecticut 06520-8281 http://cowles.yale.edu/ DYNAMIC AIRLINE PRICING AND SEAT AVAILABILITY Kevin R. Williams Yale School of Management and NBER∗ May 2020y Abstract Airfares fluctuate over time due to both demand shocks and intertemporal varia- tion in willingness to pay. I develop and estimate a model of dynamic airline pricing accounting for both forces with new flight-level data. With the model estimates, I dis- entangle key interactions between the arrival pattern of consumer types and scarcity of remaining capacity due to stochastic demand. I show that dynamic airline pricing expands output by lowering fares charged to early-arriving, price-sensitive customers. It also ensures seats for late-arriving travelers with the highest willingness to pay (e.g. business travelers) who are then charged high prices. I find that dynamic airline pricing increases total welfare relative to a more restrictive pricing regime. Finally, I show that abstracting from stochastic demand results in incorrect inferences regarding the extent to which airlines utilize intertemporal price discrimination. JEL: L11, L12, L93 ∗
[email protected] yI thank Judy Chevalier, Jim Dana, Tom Holmes, Olivia Natan, Aniko Öry, Hayden Parsley, Amil Petrin, Tom Quan, Timothy Schwieg, and Joel Waldfogel for comments. I thank the seminar participants at the Federal Reserve Bank of Minneapolis, Yale School of Management, University of Chicago - Booth, Georgetown Uni- versity, University of British Columbia, University of Rochester - Simon, Dartmouth University, Northwestern University - Kellogg, Federal Reserve Board, Reserve Bank of Richmond, Indiana University, Indiana Uni- versity - Kelley, Marketing Science, Stanford Institute for Theoretical Economics (SITE), and the University of Pennsylvania for comments.