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

Ali Hortascu, Olivia R. Natan, Hayden Parsley, Timothy Schwieg and Kevin R. Williams ()
Additional contact information
Ali Hortascu: 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, https://som.yale.edu/faculty/kevin-r-williams

No 2312R3, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, 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.

Keywords: Dynamic Pricing; Pricing Heuristics; Organizational Structure; Revenue Management; Behavioral IO; Airlines (search for similar items in EconPapers)
JEL-codes: C11 C53 D22 D42 L10 L93 (search for similar items in EconPapers)
Pages: 69 pages
Date: 2021-11, Revised 2023-01
New Economics Papers: this item is included in nep-com and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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