Document Type
Discussion Paper
Publication Date
1-2023
CFDP Number
2312R3
CFDP Revision Date
January 2023
CFDP Pages
69
Journal of Economic Literature (JEL) Code(s)
C11, C53, D22, D42, L10, L93
Abstract
Firms facing complex objectives often decompose the problems they face, delegating different parts of the decision to distinct subordinates. Using comprehensive data and internal models from a large U.S. airline, we establish that airline pricing is inconsistent with canonical dynamic pricing models. However, we show that observed prices can be rationalized as an equilibrium of a game played by departments who each have decision rights for different inputs that are supplied to the observed pricing heuristic. Incorrectly assuming that the firm solves a standard profit maximization problem as a single entity understates overall welfare actually achieved but affects business and leisure consumers differently. Likewise, we show that assuming prices are set through standard profit maximization leads to incorrect inferences about consumer demand elasticities and thus welfare.
Recommended Citation
Hortaçsu, Ali; Natan, Olivia R.; Parsley, Hayden; Schwieg, Timothy; and Williams, Kevin R., "Organizational Structure and Pricing: Evidence from a Large U.S. Airline" (2023). Cowles Foundation Discussion Papers. 2724.
https://elischolar.library.yale.edu/cowles-discussion-paper-series/2724