Optimizing for green skies: How do herd effects and customer heterogeneity impact airline optimal pricing and reputation investment?

As public scrutiny of aviation emissions intensifies, airlines face the challenge of balancing corporate social responsibility (CSR) with profitability. This study examines how CSR reputation, particularly concerning adopting sustainable aviation fuel (SAF), influences airlines’ investment and pricing strategies. We develop a two-stage sequential decision model to analyze the interplay between CSR reputation, pricing strategies, herd effects, and customer heterogeneity. This model considers both congestion effects and the impact of CSR reputation on herd behavior among customers. We examine two pricing strategies: uniform pricing with standard green service and differentiated pricing with tailored services. Using backward induction, we determine the optimal reputation investment and pricing strategy under various market conditions. Further, we introduce an integrated efficiency indicator that captures the combined influence of sensitivity to herd effects, investment costs, customer heterogeneity, and congestion to guide airlines in selecting the optimal pricing strategy. This indicator gives airlines a practical tool for navigating the complex trade-offs between CSR investment, pricing, and market dynamics. Results indicate that while herd behavior incentivizes reputation investment, a critical threshold exists for the relative efficacy of uniform versus differentiated pricing. The inherent cost of implementing differentiated pricing necessitates a more substantial efficiency gain to surpass uniform pricing.