Dynamic Price Competition: Theory and Evidence from Airline Markets

Aniko …ry (), Ali Horta su and Kevin Williams ()
Additional contact information
Aniko …ry: Cowles Foundation, Yale University
Ali Horta su: University of Chicago and NBER
Kevin Williams: Cowles Foundation, Yale University, https://economics.yale.edu/people/kevin-williams

No 2341, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: We introduce a model of oligopoly dynamic pricing where firms with limited capacity face a sales deadline. We establish conditions under which the equilibrium is unique and converges to a system of differential equations. Using unique and comprehensive pricing and bookings data for competing U.S. airlines, we estimate our model and find that dynamic pricing results in higher output but lower welfare than under uniform pricing. Our theoretical and empirical findings run counter to standard results in single-firm settings due to the strategic role of competitor scarcity. Pricing heuristics commonly used by airlines increase welfare relative to estimated equilibrium predictions.

JEL-codes: C70 C73 D21 D22 D43 D60 L13 L93 (search for similar items in EconPapers)
Pages: 73 pages
Date: 2022-08
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