Managing Airfares Under Competition: Insights from a Field Experiment

Maxime C. Cohen (), Alexandre Jacquillat (), Juan Camilo Serpa () and Michael Benborhoum ()
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Maxime C. Cohen: Desautels Faculty of Management, McGill University, Montreal, Quebec H3A 1G5, Canada
Alexandre Jacquillat: Sloan School of Management, Massachusetts Institute of Technology, Cambridge, Massachusetts 02142
Juan Camilo Serpa: Desautels Faculty of Management, McGill University, Montreal, Quebec H3A 1G5, Canada
Michael Benborhoum: Twilio, New York, New York

Management Science, 2023, vol. 69, issue 10, 6076-6108

Abstract: Airfares evolve dynamically, giving rise to a so-called price path . This price path is controlled via two levers: (i) a fare ladder, which defines a set of airfares before the selling season, and (ii) revenue management algorithms, which control how fares evolve along the ladder during the season. We hypothesize that the current policies to control both levers—which do not account for quality differences between competing airlines—give rise to an inefficient price path and, accordingly, a loss of potential revenue. We substantiate this hypothesis via a field experiment. By partnering with an airline, we introduced quality considerations in the design of fare ladders, across 5,000 itineraries, to show that current ladder-design policies indeed lead to a suboptimal price path. We also show that this inefficiency can be mitigated by incorporating quality differences between competing airlines. This creates a smoother (and more profitable) price path.

Keywords: airline pricing; field experiment; lead-in fare (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:69:y:2023:i:10:p:6076-6108

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