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Dynamic pricing mechanisms for the airline industry: a definitional framework

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  • Michael D. Wittman

    (Massachusetts Institute of Technology, International Center for Air Transportation)

  • Peter P. Belobaba

    (Massachusetts Institute of Technology, International Center for Air Transportation)

Abstract

The phrase “dynamic pricing” has entered the airline revenue management lexicon in recent years with the emergence of new distribution capabilities that could allow airlines to adjust ticket prices more frequently. Yet each airline, vendor, and academic has a unique (and often incongruous) view of what dynamic pricing encompasses. To date, there has not been a definition of dynamic pricing proposed in the literature that clearly delineates how these mechanisms are different from traditional airline pricing and revenue management. In this paper, we propose a definitional framework for dynamic pricing for the airline industry. After providing a general definition of dynamic pricing, we describe three mechanisms for price selection—assortment optimization, dynamic price adjustment, and continuous pricing. Depending on the implementation and the information available to the airline at the time of pricing, each of these mechanisms could be used to adjust prices relatively infrequently or, at the limit, on a transaction-by-transaction basis. We close by linking recent technological developments in airline pricing, revenue management, and distribution to the three mechanisms introduced in the framework.

Suggested Citation

  • Michael D. Wittman & Peter P. Belobaba, 2019. "Dynamic pricing mechanisms for the airline industry: a definitional framework," Journal of Revenue and Pricing Management, Palgrave Macmillan, vol. 18(2), pages 100-106, April.
    • Handle: RePEc:pal:jorapm:v:18:y:2019:i:2:d:10.1057_s41272-018-00162-6
    DOI: 10.1057/s41272-018-00162-6
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    References listed on IDEAS

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    1. Melanie Dezelak & Richard Ratliff, 2018. "Towards new industry-standard specifications for air dynamic pricing engines," Journal of Revenue and Pricing Management, Palgrave Macmillan, vol. 17(6), pages 394-402, December.
    2. Ravi Kumar & Ang Li & Wei Wang, 2018. "Learning and optimizing through dynamic pricing," Journal of Revenue and Pricing Management, Palgrave Macmillan, vol. 17(2), pages 63-77, April.
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    4. Wedad Elmaghraby & P{i}nar Keskinocak, 2003. "Dynamic Pricing in the Presence of Inventory Considerations: Research Overview, Current Practices, and Future Directions," Management Science, INFORMS, vol. 49(10), pages 1287-1309, October.
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    6. A. Gürhan Kök & Marshall L. Fisher & Ramnath Vaidyanathan, 2008. "Assortment Planning: Review of Literature and Industry Practice," International Series in Operations Research & Management Science, in: Narendra Agrawal & Stephen A. Smith (ed.), Retail Supply Chain Management, chapter 0, pages 99-153, Springer.
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    Cited by:

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    2. Stacey Mumbower & Susan Hotle & Laurie A. Garrow, 2023. "Highly debated but still unbundled: The evolution of U.S. airline ancillary products and pricing strategies," Journal of Revenue and Pricing Management, Palgrave Macmillan, vol. 22(4), pages 276-293, August.
    3. Kevin K. Wang & Michael D. Wittman & Adam Bockelie, 2021. "Dynamic offer generation in airline revenue management," Journal of Revenue and Pricing Management, Palgrave Macmillan, vol. 20(6), pages 654-668, December.
    4. Daniel Schubert & Christa Sys & Rosário Macário, 2022. "Customized airline offer management: a conceptual architecture," Journal of Revenue and Pricing Management, Palgrave Macmillan, vol. 21(5), pages 553-563, October.
    5. Resul Aydemir & Mehmet Melih Değirmenci & Abdullah Bilgin, 2023. "Estimation of passenger sell-up rates in airline revenue management by considering the effect of fare class availability," Journal of Revenue and Pricing Management, Palgrave Macmillan, vol. 22(6), pages 501-513, December.
    6. Octavian Oancea, 0. "Optimizing airline fare structures," Journal of Revenue and Pricing Management, Palgrave Macmillan, vol. 0, pages 1-4.
    7. Jin, Jie & He, Junliang & Wang, Xudong & Han, Chuanfeng & Meng, Lingpeng, 2024. "Contract design in ocean shipping market: A performance credit leveraged mechanism," International Journal of Production Economics, Elsevier, vol. 272(C).
    8. Zhao, Guihong & Cui, Yue & Cheng, Shaoyu, 2021. "Dynamic pricing of ancillary services based on passenger choice behavior," Journal of Air Transport Management, Elsevier, vol. 94(C).
    9. Octavian Oancea, 2020. "Optimizing airline fare structures," Journal of Revenue and Pricing Management, Palgrave Macmillan, vol. 19(4), pages 230-233, August.
    10. Bazyli Szymański & Peter P. Belobaba & Alexander Papen, 2021. "Continuous pricing algorithms for airline RM: revenue gains and competitive impacts," Journal of Revenue and Pricing Management, Palgrave Macmillan, vol. 20(6), pages 669-688, December.
    11. Lee, Boram & Fraser, Ian & Fillis, Ian, 2022. "To sell or not to sell? Pricing strategies of newly-graduated artists," Journal of Business Research, Elsevier, vol. 145(C), pages 595-604.
    12. Yanbin Long & Peter Belobaba, 2024. "Airline revenue management with segmented continuous pricing: methods and competitive effects," Journal of Revenue and Pricing Management, Palgrave Macmillan, vol. 23(1), pages 14-27, February.

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