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Dynamic Pricing, Advance Sales and Aggregate Demand Learning in Airlines

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  • Diego Escobari

Abstract

This paper uses a unique U.S. airlines panel data set to empirically study the dynamic pricing of inventories with uncertain demand over a finite horizon. I estimate a dynamic pricing equation and a dynamic demand equation that jointly characterize the adjustment process between prices and sales as the flight date nears. I find that the price increases as the inventory decreases, and decreases as there is less time to sell. Consistent with aggregate demand learning and price adjustment, demand shocks have a positive and much larger effect on prices than the positive effect of anticipated sales.
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  • Diego Escobari, 2012. "Dynamic Pricing, Advance Sales and Aggregate Demand Learning in Airlines," Journal of Industrial Economics, Wiley Blackwell, vol. 60(4), pages 697-724, December.
  • Handle: RePEc:bla:jindec:v:60:y:2012:i:4:p:697-724
    DOI: 10.1111/joie.2012.60.issue-4
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    Cited by:

    1. Escobari, Diego & Jindapon, Paan, 2014. "Price discrimination through refund contracts in airlines," International Journal of Industrial Organization, Elsevier, vol. 34(C), pages 1-8.
    2. Diego Escobari & Diego E. Vacaflores, 2015. "Expectations and the Dynamic Feedback between Foreign Direct Investment and Economic Growth," International Economic Journal, Taylor & Francis Journals, vol. 29(1), pages 121-136, March.
    3. Diego Escobari & Sang-Yeob Lee, 2012. "Demand shifting across flights and airports in a spatial competition model," Letters in Spatial and Resource Sciences, Springer, vol. 5(3), pages 175-183, October.
    4. Diego Escobari & Jim Lee, 2014. "Demand uncertainty and capacity utilization in airlines," Empirical Economics, Springer, vol. 47(1), pages 1-19, August.
    5. Benjamin Eden, 2013. "Price Dispersion And Demand Uncertainty: Evidence From Us Scanner Data," Vanderbilt University Department of Economics Working Papers 13-00015, Vanderbilt University Department of Economics.
    6. repec:eee:touman:v:47:y:2015:i:c:p:152-163 is not listed on IDEAS
    7. Escobari, Diego, 2014. "Estimating dynamic demand for airlines," Economics Letters, Elsevier, vol. 124(1), pages 26-29.
    8. repec:eee:transa:v:103:y:2017:i:c:p:198-210 is not listed on IDEAS
    9. Siegert, Caspar & Ulbricht, Robert, 2014. "Dynamic Oligopoly Pricing: Evidence from the Airline Industry," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 463, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    10. Ivaldi, Marc & Petrova, Milena J & Urdanoz, Miguel, 2014. "AirTicket Sales as Bids from Airline Alliances," TSE Working Papers 14-546, Toulouse School of Economics (TSE), revised 26 Jan 2015.
    11. Escobari Diego & Mollick André Varella, 2013. "Output growth and unexpected government expenditures," The B.E. Journal of Macroeconomics, De Gruyter, vol. 13(1), pages 1-33, September.
    12. repec:eee:touman:v:54:y:2016:i:c:p:502-512 is not listed on IDEAS
    13. Diego Escobari, 2013. "Asymmetric Price Adjustments in Airlines," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 34(2), pages 74-85, March.
    14. Chiou, Yu-Chiun & Liu, Chia-Hsin, 2016. "Advance purchase behaviors of air passengers: A continuous logit model," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 93(C), pages 474-484.
    15. Varella, Rafael R. & Frazão, Jessica & Oliveira, Alessandro V.M., 2017. "Dynamic pricing and market segmentation responses to low-cost carrier entry," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 98(C), pages 151-170.
    16. Alderighi, Marco & Gaggero, Alberto A & Piga, Claudio A, 2016. "The hidden side of dynamic pricing in airline markets," MPRA Paper 71674, University Library of Munich, Germany.
    17. repec:eme:aiaezz:s2212-160920140000004006 is not listed on IDEAS
    18. Cattaneo, Mattia & Malighetti, Paolo & Morlotti, Chiara & Redondi, Renato, 2016. "Quantity price discrimination in the air transport industry: The easyJet case," Journal of Air Transport Management, Elsevier, vol. 54(C), pages 1-8.
    19. Bilotkach, Volodymyr & Gaggero, Alberto A. & Piga, Claudio A., 2015. "Airline pricing under different market conditions: Evidence from European Low-Cost Carriers," Tourism Management, Elsevier, vol. 47(C), pages 152-163.
    20. Benjamin Eden, 2014. "Demand uncertainty and efficiency," Vanderbilt University Department of Economics Working Papers 14-00011, Vanderbilt University Department of Economics.
    21. Chiou, Yu-Chiun & Liu, Chia-Hsin, 2016. "Advance purchase behaviors of air tickets," Journal of Air Transport Management, Elsevier, vol. 57(C), pages 62-69.
    22. Escobari, Diego, 2017. "Airport, airline and departure time choice and substitution patterns: An empirical analysis," Transportation Research Part A: Policy and Practice, Elsevier, vol. 103(C), pages 198-210.
    23. Benjamin Eden & Maya Eden & Jonah Yuen, 2016. "Inside The Price Dispersion Box: Evidence From Us Scanner Data," Vanderbilt University Department of Economics Working Papers 16-00017, Vanderbilt University Department of Economics.
    24. repec:eee:touman:v:61:y:2017:i:c:p:23-34 is not listed on IDEAS
    25. Diego Escobari & Cristhian Mellado, 2014. "The Choice of Airport, Airline, and Departure Date and Time: Estimating the Demand for Flights," Advances in Airline Economics,in: The Economics of International Airline Transport, volume 4, pages 177-198 Emerald Publishing Ltd.

    More about this item

    JEL classification:

    • L93 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Air Transportation
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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