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 2312R4, 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 sub-units. Using comprehensive data and internal models from a large U.S. airline, we establish that airline pricing is not well approximated by a model of the Þrm as a unitary decision-maker. We show that observed prices, however, can be rationalized by account-ing for organizational structure and the decisions by departments that are tasked with supplying inputs to the observed pricing heuristic. Simulating the prices the Þrm would charge if it were a rational unitary decision-maker results in lower welfare than we estimate under observed practices. Finally, we discuss why counterfactual estimates of welfare and market power may be biased if prices are set through decomposition, but we instead assume that they are set by unitary decision-makers.

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: 160 pages
Date: 2021-11, Revised 2023-06
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