Randomization and price discrimination: The profitability of a mixed pricing strategy for airfares
(2010) NEKM01 20101Department of Economics
- Abstract (Swedish)
- In the airline industry, it is critical for carriers to vary prices offered to different customer groups in order to extract maximum willingness-to-pay from each consumer. This essay investigates a dynamic form of third-degree price discrimination in which prices are strategically adjusted as departure date approaches. It is hypothesized that by including a stochastic element in their pricing schemes, airlines can induce customers to self-select based upon their reservation prices, improving their profitability. Specifically, a mixed, randomized strategy in which expected price decreases over time may prompt risk-averse consumers with high reservation prices to purchase before customers with lesser reservation prices are offered a lower... (More)
- In the airline industry, it is critical for carriers to vary prices offered to different customer groups in order to extract maximum willingness-to-pay from each consumer. This essay investigates a dynamic form of third-degree price discrimination in which prices are strategically adjusted as departure date approaches. It is hypothesized that by including a stochastic element in their pricing schemes, airlines can induce customers to self-select based upon their reservation prices, improving their profitability. Specifically, a mixed, randomized strategy in which expected price decreases over time may prompt risk-averse consumers with high reservation prices to purchase before customers with lesser reservation prices are offered a lower market price. Following this theoretical inquiry, an empirical examination reveals the possibility that such a pricing strategy is incorporated into pricing of airfares in the current market. Time series of flight data are studied, with a decomposition of fare prices into their systematic components revealing that an additional stochastic element may indeed be present. (Less)
Please use this url to cite or link to this publication:
http://lup.lub.lu.se/student-papers/record/1612484
- author
- Younes, Jelal LU
- supervisor
- organization
- course
- NEKM01 20101
- year
- 2010
- type
- H1 - Master's Degree (One Year)
- subject
- keywords
- mixed pricing strategy, price discrimination, airline pricing, inter-temporal pricing
- language
- English
- id
- 1612484
- date added to LUP
- 2010-06-29 11:00:59
- date last changed
- 2010-06-29 11:00:59
@misc{1612484,
abstract = {{In the airline industry, it is critical for carriers to vary prices offered to different customer groups in order to extract maximum willingness-to-pay from each consumer. This essay investigates a dynamic form of third-degree price discrimination in which prices are strategically adjusted as departure date approaches. It is hypothesized that by including a stochastic element in their pricing schemes, airlines can induce customers to self-select based upon their reservation prices, improving their profitability. Specifically, a mixed, randomized strategy in which expected price decreases over time may prompt risk-averse consumers with high reservation prices to purchase before customers with lesser reservation prices are offered a lower market price. Following this theoretical inquiry, an empirical examination reveals the possibility that such a pricing strategy is incorporated into pricing of airfares in the current market. Time series of flight data are studied, with a decomposition of fare prices into their systematic components revealing that an additional stochastic element may indeed be present.}},
author = {{Younes, Jelal}},
language = {{eng}},
note = {{Student Paper}},
title = {{Randomization and price discrimination: The profitability of a mixed pricing strategy for airfares}},
year = {{2010}},
}