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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 often involve multiple departments for critical decisions that may result in coordination failures. Using data from a large U.S. airline, we document the presence of important pricing biases that differ significantly from dynamically optimal profit maximization. However, these biases can be rationalized as a Òsecond-bestÓ after accounting for department decision rights. We show that assuming prices are generated through profit maximization biases demand estimates and that second-best prices can persist, even under improvements to pricing algorithm inputs. Our results suggest caution in abstracting from organizational structure and drawing inferences from firmsÕ pricing decisions alone.

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 2312R2, Cowles Foundation for Research in Economics, Yale University, revised Oct 2022.
    • Handle: RePEc:cwl:cwldpp:2312r2
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    File URL: https://cowles.yale.edu/sites/default/files/files/pub/d23/d2312-r2.pdf
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    More about this item

    Keywords

    Pricing; Organizational Structure; Revenue Management; Pricing Frictions; Behavioral IO;
    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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