Document Type

Discussion Paper

Publication Date

8-1-2017

CFDP Number

2103

CFDP Revision Date

February 1, 2018

CFDP Pages

56

Journal of Economic Literature (JEL) Code(s)

L11, L12, L93

Abstract

Airfares are determined by both intertemporal price discrimination and dynamic adjustment to stochastic demand. I estimate a model of dynamic airline pricing accounting for both forces with new flight-level data. With model estimates, I disentangle key interactions between the arrival pattern of consumer types and remaining capacity under stochastic demand. I show that the forces are complements in airline markets and lead to significantly higher revenues, as well as increased consumer surplus, compared to a more restrictive pricing regime. Finally, I show that abstracting from stochastic demand leads to a systematic bias in estimating demand elasticities.

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Economics Commons

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