Document Type

Discussion Paper

Publication Date

11-2021

CFDP Number

2312R2

CFDP Revision Date

October 2022

CFDP Pages

57

Journal of Economic Literature (JEL) Code(s)

C11, C53, D22, D42, L10, L93

Abstract

Firms often involve multiple departments for critical decisions that may result in coordination failures. Using data from a large U.S. airline, we document the presence of important pricing biases that differ significantly from dynamically optimal profit maximization. However, these biases can be rationalized as a “second-best” after accounting for department decision rights. We show that assuming prices are generated through profit maximization biases demand estimates and that second-best prices can persist, even under improvements to pricing algorithm inputs. Our results suggest caution in abstracting from organizational structure and drawing inferences from firms’ pricing decisions alone.

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