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The Welfare Effects of Dynamic Pricing: Evidence From Airline Markets

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  • Kevin R. Williams

Abstract

Airfares fluctuate due to demand shocks and intertemporal variation in willingness to pay. I estimate a model of dynamic airline pricing accounting for both sources of price adjustments using flight‐level data. I use the model estimates to evaluate the welfare effects of dynamic airline pricing. Relative to uniform pricing, dynamic pricing benefits early‐arriving, leisure consumers at the expense of late‐arriving, business travelers. Although dynamic pricing ensures seat availability for business travelers, these consumers are then charged higher prices. When aggregated over markets, welfare is higher under dynamic pricing than under uniform pricing. The direction of the welfare effect at the market level depends on whether dynamic price adjustments are mainly driven by demand shocks or by changes in the overall demand elasticity.

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  • Kevin R. Williams, 2022. "The Welfare Effects of Dynamic Pricing: Evidence From Airline Markets," Econometrica, Econometric Society, vol. 90(2), pages 831-858, March.
    • Handle: RePEc:wly:emetrp:v:90:y:2022:i:2:p:831-858
    DOI: 10.3982/ECTA16180
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    4. Myongjin Kim & Leilei Shen & Qi Ge, 2023. "Does Competition Increase or Decrease Price Dispersion? Insights from One‐Way vs. Round‐Trip Airfares," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 85(2), pages 435-455, April.
    5. Ali Hortacsu & Olivia R. Natan & Hayden Parsley & Timothy Schwieg & Kevin R. Williams, 2021. "Incorporating Search and Sales Information in Demand Estimation," Cowles Foundation Discussion Papers 2313R1, Cowles Foundation for Research in Economics, Yale University, revised Mar 2023.
    6. DHaultfoeuille, Xavier & Wang, Ao & Fevrier, Philippe & Wilner, Lionel, 2022. "Estimating the Gains (and Losses) of Revenue Management," CAGE Online Working Paper Series 621, Competitive Advantage in the Global Economy (CAGE).
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    8. Manuela Rozalia Gabor & Mihaela Kardos & Flavia Dana Oltean, 2022. "Yield Management—A Sustainable Tool for Airline E-Commerce: Dynamic Comparative Analysis of E-Ticket Prices for Romanian Full-Service Airline vs. Low-Cost Carriers," Sustainability, MDPI, vol. 14(22), pages 1-19, November.
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