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Randomization and price discrimination: The profitability of a mixed pricing strategy for airfares

Younes, Jelal LU (2010) NEKM01 20101
Department 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)
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author
Younes, Jelal LU
supervisor
organization
course
NEKM01 20101
year
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},
  keyword      = {mixed pricing strategy,price discrimination,airline pricing,inter-temporal pricing},
  language     = {eng},
  note         = {Student Paper},
  title        = {Randomization and price discrimination: The profitability of a mixed pricing strategy for airfares},
  year         = {2010},
}