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Wait or buy? The strategic consumer: Pricing and profit implications

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  • C K Anderson

    (Richard Ivey School of Business)

  • J G Wilson

    (Richard Ivey School of Business)

Abstract

Using tools from operations research, airlines have, for many years, taken a strategic approach to pricing the seats available on a particular flight based on demand forecasts and information. The result of this approach is that the same seat on the same flight is often offered at different fares at different times. Setting of these prices using yield-management approaches is a major activity for many airlines and is well studied in the literature. However, consumers are becoming increasingly aware of the existence of pricing strategies used by airlines. In addition, the availability of airline travel pricing on the Internet affords consumers the opportunity to behave more strategically when making purchase decisions. The onset of the information age makes it possible for an informed consumer or a third party, such as a travel agent, to obtain demand information similar to that used by the airlines. In particular, it is possible for consumers or travel agents to purchase historical data or to obtain it by monitoring the seats that are available at various prices for a given flight. If a consumer understands the pricing strategy and has access to demand information, he/she may decide to defer purchase of a ticket because they believe that a cheaper seat may yet become available. If consumers were to make use of this information to make such strategic purchasing decisions, what would be the impact on airline revenues? The purpose of this paper is to investigate these impacts. This work indicates that use of standard yield management approaches to pricing by airlines can result in significantly reduced revenues when buyers are using an informed and strategic approach to purchasing. Therefore, when airlines are setting or presenting prices, they should investigate the effect of strategic purchasing on their decisions.

Suggested Citation

  • C K Anderson & J G Wilson, 2003. "Wait or buy? The strategic consumer: Pricing and profit implications," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 54(3), pages 299-306, March.
  • Handle: RePEc:pal:jorsoc:v:54:y:2003:i:3:d:10.1057_palgrave.jors.2601497
    DOI: 10.1057/palgrave.jors.2601497
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    References listed on IDEAS

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    Cited by:

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    2. Wedad Elmaghraby & Altan Gülcü & P{i}nar Keskinocak, 2008. "Designing Optimal Preannounced Markdowns in the Presence of Rational Customers with Multiunit Demands," Manufacturing & Service Operations Management, INFORMS, vol. 10(1), pages 126-148, June.
    3. Mantin, Benny & Gillen, David, 2011. "The hidden information content of price movements," European Journal of Operational Research, Elsevier, vol. 211(2), pages 385-393, June.
    4. Hattori, Keisuke & Zennyo, Yusuke, 2018. "Heterogeneous Consumer Expectations and Monopoly Pricing for Durables with Network Externalities," MPRA Paper 89893, University Library of Munich, Germany, revised 08 Nov 2018.
    5. Wu, Cheng-Lung & So, T.H. Hanson, 2018. "On the flight choice behaviour of business-purpose passengers in the Australian domestic air market," Journal of Air Transport Management, Elsevier, vol. 72(C), pages 56-67.
    6. Jun Li & Nelson Granados & Serguei Netessine, 2014. "Are Consumers Strategic? Structural Estimation from the Air-Travel Industry," Management Science, INFORMS, vol. 60(9), pages 2114-2137, September.
    7. Peng Du & Qiushuang Chen, 2017. "Skimming or penetration: optimal pricing of new fashion products in the presence of strategic consumers," Annals of Operations Research, Springer, vol. 257(1), pages 275-295, October.
    8. Shirin Aslani & Soheil Sibdari & Mohammad Modarres, 2018. "Revenue Management with Customers’ Reference Price: Are the Existing Methods Effective?," Service Science, INFORMS, vol. 10(2), pages 195-214, June.
    9. Cattaneo, Mattia & Malighetti, Paolo & Redondi, Renato & Salanti, Andrea, 2018. "Changes in frequencies and price variations on point-to-point routes: The case of easyJet," Transportation Research Part A: Policy and Practice, Elsevier, vol. 112(C), pages 60-70.
    10. Adam J. Mersereau & Dan Zhang, 2012. "Markdown Pricing with Unknown Fraction of Strategic Customers," Manufacturing & Service Operations Management, INFORMS, vol. 14(3), pages 355-370, July.
    11. Dong, Junfeng & Wu, Desheng Dash, 2019. "Two-period pricing and quick response with strategic customers," International Journal of Production Economics, Elsevier, vol. 215(C), pages 165-173.
    12. Hattori, Keisuke & Zennyo, Yusuke, 2018. "Pricing and Diffusion of Durables with Network Externalities," MPRA Paper 86203, University Library of Munich, Germany.
    13. Qian Liu & Garrett van Ryzin, 2011. "Strategic Capacity Rationing when Customers Learn," Manufacturing & Service Operations Management, INFORMS, vol. 13(1), pages 89-107, September.
    14. Kim, Sang-Won, 2015. "The impact of customer buying behavior on the optimal allocation decisions," International Journal of Production Economics, Elsevier, vol. 163(C), pages 71-88.
    15. Scott Fay & Juliano Laran, 2009. "Implications of Expected Changes in the Seller's Price in Name-Your-Own-Price Auctions," Management Science, INFORMS, vol. 55(11), pages 1783-1796, November.
    16. Benny Mantin & Eran Rubin, 2016. "Fare Prediction Websites and Transaction Prices: Empirical Evidence from the Airline Industry," Marketing Science, INFORMS, vol. 35(4), pages 640-655, July.
    17. Ma Changsong & Li Tian & Li Cong & He Hua, 2014. "Pricing Strategy and Governments Intervention for Green Supply Chain with Strategic Customer Behavior," Journal of Systems Science and Information, De Gruyter, vol. 2(3), pages 206-216, June.
    18. John G. Wilson & Jing Chen, 2018. "On the optimality of coupon books," Annals of Operations Research, Springer, vol. 268(1), pages 405-423, September.
    19. Mantin, Benny & Rubin, Eran, 2018. "Price volatility and market performance measures: The case of revenue managed goods," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 120(C), pages 35-50.
    20. Dror Hermel & Benny Mantin, 2018. "Selling to strategic consumers: on the benefits of consumers’ valuation uncertainty and abundant inventory," Journal of Revenue and Pricing Management, Palgrave Macmillan, vol. 17(3), pages 146-165, June.
    21. Chenxu Ke & Bo Yan & Ruofan Xu, 2017. "A group-buying mechanism for considering strategic consumer behavior," Electronic Commerce Research, Springer, vol. 17(4), pages 721-752, December.
    22. Mantin, Benny & Koo, Bonwoo, 2009. "Dynamic price dispersion in airline markets," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 45(6), pages 1020-1029, November.

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