Are Consumers Strategic? Structural Estimation from the Air-Travel Industry

Jun Li (), Nelson Granados () and Serguei Netessine ()
Additional contact information
Jun Li: Ross School of Business, University of Michigan, Ann Arbor, Michigan 48109
Nelson Granados: Graziadio School of Business and Management, Pepperdine University, Irvine, California 92612
Serguei Netessine: INSEAD, 77305 Fontainebleau, France

Management Science, 2014, vol. 60, issue 9, 2114-2137

Abstract: Consumers often consider delaying a purchase strategically, anticipating that prices might decrease. Combining two unique data sources from the air-travel industry (posted fare data and booking data), we use a structural model to estimate the fraction of strategic consumers in the population, assuming different levels of sophistication in consumers' perception of future prices: perfect foresight and weak- and strong-form rational expectations. We find that 5.2% to 19.2% of the population is strategic across markets, measured by the first and third quartiles. Our intermarket analysis indicates that shorter trips with more attractive outside options are populated with more strategic consumers. Using a nonparametric approach, we further find that most strategic consumers arrive either at the beginning of the booking horizon or close to departure. Finally, our counterfactual analysis shows that, contrary to conventional wisdom, the presence of strategic consumers does not necessarily hurt revenues. Rather, the impact varies by market. Commitment to a nondecreasing pricing strategy is more likely to benefit business markets than leisure markets, or it could even hurt leisure markets. Intermarket analysis shows that city pairs with lower Internet penetration, higher average price, and shorter distances tend to benefit more from such commitment as well. This paper was accepted by Yossi Aviv, operations management .

Keywords: econometrics; structural estimation; air travel; strategic customer behavior (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (106)

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