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Dynamic Price Competition: Theory and Evidence from Airline Markets

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Abstract

We introduce a model of dynamic pricing in perishable goods markets with competition and provide conditions for equilibrium uniqueness. Pricing dynamics are rich because both own and competitor scarcity affect future profits. We identify new competitive forces that can lead to misallocation due to selling units too quickly: the Bertrand scarcity trap. We empirically estimate our model using daily prices and bookings for competing U.S. airlines. We compare competitive equilibrium outcomes to those where firms use pricing heuristics based on observed internal pricing rules at a large airline. We find that pricing heuristics increase revenues (4-5%) and consumer surplus (3%).

Suggested Citation

  • Aniko …ry & Ali Horta su & Kevin Williams, 2022. "Dynamic Price Competition: Theory and Evidence from Airline Markets," Cowles Foundation Discussion Papers 2341R1, Cowles Foundation for Research in Economics, Yale University, revised Apr 2023.
    • Handle: RePEc:cwl:cwldpp:2341r1
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    References listed on IDEAS

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    Cited by:

    1. Ali Hortacsu & Olivia R. Natan & Hayden Parsley & Timothy Schwieg & Kevin R. Williams, 2021. "Organizational Structure and Pricing: Evidence from a Large U.S. Airline," Cowles Foundation Discussion Papers 2312R4, Cowles Foundation for Research in Economics, Yale University, revised Jun 2023.

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    More about this item

    JEL classification:

    • C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D60 - Microeconomics - - Welfare Economics - - - General
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L93 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Air Transportation

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