Harmful Freedom of Choice: Lessons from the Cellphone Market

This article focuses on the relationship between provider and customer, specifically on the complexity of available contracts in the cellphone market and the ways this complexity might be harmful to consumers. This article aims to elucidate the issues, fleshing them out both as a general phenomenon and as a specific implementation in the cellphone context. The aim is not to provide ultimate solutions, but to show the directions these solutions might take and the difficulties involved

An Empirical Analysis of Optimal Nonlinear Pricing

In continuous-choice settings, consumers decide not only on whether to purchase a product, but also on how much to purchase. Thus, firms optimize a full price schedule rather than a single price point. This paper provides a methodology to empirically estimate the optimal schedule under multi-dimensional consumer heterogeneity. We apply our method to novel data from an educational-services firm that contains purchase-size information not only for deals that materialized, but also for potential deals that eventually failed. We show that this data, combined with identifying assumptions, helps infer how price sensitivity varies with "customer size". Using our estimated model, we show that the optimal second-degree price discrimination (i.e., optimal nonlinear tariff) improves the firm's profit upon linear pricing by at least 5.5%. That said, this second-degree price discrimination scheme only recovers 5.1% of the gap between the profitability of linear pricing and that of infeasible first degree price discrimination. We also conduct several further counterfactual analyses (i) empirically quantifying the magnitude by which incentive-compatibility constraints impact the optimal pricing and profits, (ii) comparing the role of demand- v.s. cost-side factors in shaping the optimal price schedule, and (iii) studying the implications of fixed fees for the optimal contract and profitability

Organizational Structure and Pricing: Evidence from a Large U.S. Airline

Firms facing complex objectives often decompose the problems they face, delegating different parts of the decision to distinct subordinates. Using comprehensive data and internal models from a large U.S. airline, we establish that airline pricing is inconsistent with canonical dynamic pricing models. However, we show that observed prices can be rationalized as an equilibrium of a game played by departments who each have decision rights for different inputs that are supplied to the observed pricing heuristic. Incorrectly assuming that the firm solves a standard profit maximization problem as a single entity understates overall welfare actually achieved but affects business and leisure consumers differently. Likewise, we show that assuming prices are set through standard profit maximization leads to incorrect inferences about consumer demand elasticities and thus welfare

Organizational Structure and Pricing: Evidence from a Large U.S. Airline

Although typically modeled as a centralized firm decision, pricing often involves multiple organizational teams that have decision rights over specific pricing inputs. We study team input decisions using comprehensive data from a large U.S. airline. We document that pricing at a sophisticated firm is subject to miscoordination across teams, uses persistently biased forecasts, and does not account for cross-price elasticities. With structural demand estimates derived from sales and search data, we find that addressing one team’s biases in isolation has little impact on market outcomes. We show that teams do not optimally account for biases introduced by other teams. We estimate that corrected and coordinated inputs would lead to a significant reallocation of capacity. Leisure consumers would benefit from lower fares, and business customers would face significantly higher fares. Dead-weight loss would increase in the markets studied. Finally, we discuss likely mechanisms for the observed pricing biases

Airline Pricing under Different Market Conditions: Evidence from European Low-Cost Carriers

Traditional theories of airline pricing maintain that fares monotonically increase as fewer seats remain available on a flight. A fortiori, this implies a monotonically increasing temporal profile of fares. In this paper, we exploit the presence of drops in offered fares over time as an indicator of an active yield management intervention by two main European Low-Cost Carriers observed daily during the period June 2002 - June 2003. Our results indicate that yield management is effective in raising a flight's load factor. Furthermore, yield management interventions are more intense, and generate a stronger impact, on more competitive routes: one possible interpretation is that a reduction in competitive pressure allows the carriers to adopt a more standardized approach to pricing. Similarly, we find that yield management interventions are more effective in raising the load factor on routes where the customer mix is more heterogenous (i.e., it includes passengers traveling for leisure, business and for family matters). On markets with homogeneous customer base, no robust yield management effect was observed.Easyjet, Intertemporal Pricing, Panel Data, Ryanair, Yield Management

Price Differences in a Durable Products Secondary Market: A Hedonic Price Analysis

Secondary markets have not historically possessed the characteristics necessary for market power to emerge, or effective product differentiation to be implemented. The potential effects of these characteristics on primary – secondary market interaction is generally not considered. The law of one price is expected to hold in secondary markets. By applying the hedonic technique to producer theory, and integrating the durability of the product directly into the profit maximizing conditions, potential differences in implicit prices between customer segments in the used bucket truck market are estimated. Applying weighted least squares to the hedonic equation, parameters were estimated to indicate whether differences in hedonic prices exist between customer segments in the secondary, utility construction equipment market. The hedonic approach accounted for differences in price due to physical characteristics, while underlying supply and demand conditions were accounted for using indicator variables for time. Estimated differences in the effects of physical characteristics on price, between industries, were identified using interaction terms. Results of the econometric estimation indicate that differences in physical product characteristics do not fully account for differences in price between customer segments in the secondary bucket truck market. If the law of one price can be violated in a secondary market, this could indicate market power. Future research on primary – secondary market interaction should consider the potential effects, if such market power does indeed exist

Organizational Structure and Pricing: Evidence from a Large U.S. Airline

Firms facing complex objectives often decompose the problems they face, delegating different parts of the decision to distinct sub-units. Using comprehen-sive data and internal models from a large U.S. airline, we establish that airline pricing is not well approximated by a model of the firm as a unitary decision-maker. We show that observed prices, however, can be rationalized by account-ing for organizational structure and the decisions by departments that are tasked with supplying inputs to the observed pricing heuristic. Simulating the prices the firm would charge if it were a rational unitary decision-maker results in lower welfare than we estimate under observed practices. Finally, we discuss why counterfactual estimates of welfare and market power may be biased if prices are set through decomposition, but we instead assume that they are set by unitary decision-makers

Dynamic pricing and perceived fairness: a case study at a hotel on the West Frisian island of Vlieland, The Netherlands

The use of dynamic pricing strategies can have a tremendous impact on the hospitality industry. Understanding the variety in the type of customers and  the perceptions of customers concerning the fairness of dynamic pricing is essential. This study aimed to investigate how a dynamic pricing strategy  could positively affect the demand for a hotel located on the West Frisian island of Vlieland. This research was divided into four topics: determining  segments and corresponding booking processes, the importance of price when booking, perceived fairness of price change and how to influence  booking behaviour. This research used a survey that was presented to customers of the hotel in this case study for six weeks. Three hundred and sixty-  eight customers completed the survey. The evidence suggests that implementing a more elaborate pricing strategy would positively affect the demand  for this hotel. While price is still an essential factor when booking, it is concluded that this is not the most important consideration for consumers. If a  pricing strategy is implemented, the hotel can improve the occupancy rate and generate more hotel revenue while simultaneously keeping the  consumers satisfied. Relevant managerial implications include implementing peak load pricing to influence demand.&nbsp

Dynamic Price Competition: Theory and Evidence from Airline Markets

We introduce a model of oligopoly dynamic pricing where firms with limited capacity face a sales deadline. We establish conditions under which the equilibrium is unique and converges to a system of differential equations. Using unique and comprehensive pricing and bookings data for competing U.S. airlines, we estimate our model and find that dynamic pricing results in higher output but lower welfare than under uniform pricing. Our theoretical and empirical findings run counter to standard results in single-firm settings due to the strategic role of competitor scarcity. Pricing heuristics commonly used by airlines increase welfare relative to estimated equilibrium predictions