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Organizational Structure and Pricing: Evidence from a Large U.S. Airline

Author

Listed:
  • Ali Hortacsu

    (University of Chicago and NBER)

  • Olivia R. Natan

    (University of California, Berkeley)

  • Hayden Parsley

    (University of Texas, Austin)

  • Timothy Schwieg

    (University of Chicago, Booth)

  • Kevin R. Williams

    (Cowles Foundation, Yale University)

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.

Suggested Citation

  • Ali Hortacsu & Olivia R. Natan & Hayden Parsley & Timothy Schwieg & Kevin R. Williams, 2021. "Organizational Structure and Pricing: Evidence from a Large U.S. Airline," Cowles Foundation Discussion Papers 2312R3, Cowles Foundation for Research in Economics, Yale University, revised Jan 2023.
    • Handle: RePEc:cwl:cwldpp:2312r3
    as

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    File URL: https://cowles.yale.edu/sites/default/files/2023-04/d2312r3.pdf
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    References listed on IDEAS

    as
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    Cited by:

    1. 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.

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    More about this item

    Keywords

    Dynamic Pricing; Pricing Heuristics; Organizational Structure; Revenue Management; Behavioral IO; Airlines;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
    • L93 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Air Transportation

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