How the customer purchase pattern changes when increasing product diversity: Theory and empirical evidence from the airline industry

This paper examines the impact of introducing a new fare product on consumer purchasing behavior within the established framework of airline price discrimination strategies. Specifically, it analyzes changes in the sales distribution of existing fare products following the implementation of the new option. We first present a model that captures the essential characteristics of airline price discrimination and elucidates how the introduction of a new fare product influences firm revenue, consumer surplus, and customer decision-making. Through close collaboration with industry stakeholders, we identify two critical factors that significantly affect practical pricing strategies and consumer choice behavior: the operational use of load factor metrics and the heterogeneity in customer valuations across different fare products. Building on these industry insights, we investigate how the introduction of a new fare product interacts with load factor constraints and the misestimation of valuation differences between fare products, ultimately shaping consumer responses. In the empirical component of the study, we utilize transaction-level data from a major airline to validate the model’s predictions and derive additional managerial insights. Our analysis reveals a strong association between load factor levels and customer purchasing patterns. Moreover, the accurate estimation of the valuation gap across fare products proves to be a crucial determinant of consumer behavior. The joint analysis of load factor and valuation heterogeneity highlights their intertwined role in shaping observed purchase dynamics, demonstrating that load factor considerations and valuation misalignments jointly influence market outcomes.