The hidden sides of ‘dynamic pricing’ for airline tickets | LSE Business Review

A standard definition of dynamic pricing in airline markets typically focuses on how fares evolve over the booking period that precedes a flight’s take-off. Our research shows that such a definition is lacking because it fails to connect fare changes to some guiding principles of revenue management, defined as the combined methods used by carriers to set their fares. Once such a connection is made, we can highlight counter-intuitive instances of dynamic pricing where, on the one hand, the fare of the seat on sale, the one prospective buyers observe, does not change, or, on the other, the fare change does not correspond to a form of dynamic pricing.

The evidence in our work was obtained by tracking more than 37,000 flights operated by easyJet over the May 2014 – June 2015 period. For each flight, we retrieved fares at regular intervals starting 18 weeks before its departure. Figure 1 focuses on fare changes, both increases and decreases, for the first seat on sale, whose price is the one shown after a query on the carrier’s website. The Figure reports the aggregate proportion of observed fare changes; notably, price dynamism is more intense during the last eight booking weeks, with similar shares in terms of increases and decreases; however, the former become more prevalent in the last three weeks. Our novel approach to study fare dynamics reveals that tracking the fare of the seat on sale, which is what the literature has so far done, largely misrepresents the degree of dynamic pricing generated by the revenue managers’ activity. To understand why, we need to metaphorically ‘lift the bonnet’ and look inside the carrier’s revenue management engine.

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LSE Business Review – The hidden sides of ‘dynamic pricing’ for airline tickets.