Document Type

Discussion Paper

Publication Date

8-1-2017

CFDP Number

2103R

CFDP Revision Date

May 1, 2020

CFDP Update Date

February 1, 2018

CFDP Pages

75

Journal of Economic Literature (JEL) Code(s)

L11, L12, L93

Abstract

Airfares fluctuate over time due to both demand shocks and intertemporal variation 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 disentangle 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.

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