A study by Berkeley’s Haas School of Business debunks common myths about airline ticket pricing strategies. Instead of expected economic behavior, airlines often use limited price sets, do not adjust based on competitors’ pricing, and show signs of internal communication errors when setting prices .
A new paper co-authored with Olivia Natan of Berkeley Haas quarterly economic journal A peek into the black box of airline pricing reveals some surprises.
Buy your tickets on Tuesday. Search in your browser’s incognito mode. Use a VPN to pretend you live in Suriname.
“There are a lot of hacks for finding cheaper flights,” says Olivia Natan, an assistant professor of marketing at the university. University of California, BerkeleyHaas School of Business. “But our data show that many of these beliefs are wrong.”
myths and misconceptions
and four colleagues, Ali Hortaçsu and Timothy Schwieg. University of Chicago, Kevin Williams of Yale University, and Hayden Parsley of the University of Texas at Austin — Natan conducted a deep dive into the structures and processes behind pricing at major U.S. airlines. The system she discovered representing airlines around the world was markedly different from what most economists expect and from what most consumers assume.
“At first we didn’t know how to rationalize what we were seeing,” she says.
Substitutes and consumer behavior
Consider fruit jams sold in supermarkets. Consumers have many choices. If a company increases the price of its strawberry jam, consumers would expect sales of both strawberry jam and the adjacent raspberry jam to be affected. Because consumers can replace one jam with another.
The same thing happens with plane tickets. When you go to websites like Google Flights or Kayak and search for tickets, you’ll see a variety of flights from the same airline. Travelers tend to choose based on the balance between convenience and price. Considering the price of a single flight, you may choose a cheaper flight, albeit one that is slightly less convenient.
“But airlines are not considering these kinds of alternatives,” Natan said. They consider the price of seats on individual flights, not the total number of seats sold in a day. “Even if he changes the price of one flight, it affects how people think about all their options.”
price model
Perhaps most surprising is that airlines also don’t incorporate competitor prices into their automatic pricing. Typically, when one airline lowers prices, we expect other airlines to do the same. Otherwise, the benefits of a competitive market will be undermined.
This unconventional behavior is the result of a particular pricing heuristic, or decision-making shortcut, used by airlines called expected marginal seat revenue-b (EMSRb), Natan explains. Researchers have shown that the use of EMSRb has other consequences that consumers may not expect.
Regardless of what it looks like when you search for a flight, airlines assign a relatively small number of fixed prices to tickets for each flight. Unlike other consumer sectors, where you can adjust prices down to the penny to target your customers, airlines can set large differences between each possible price (sometimes more than $100) and It is in operation. The first 30 economy tickets are sold at the lowest price, the next 30 tickets are sold at the next possible price, and so on.
“Tickets are sold through a global distribution system, and you’ll see the same prices at your travel agent in Wichita as you would on your computer at home,” Natan says. The system was born out of an industry partnership to facilitate inventory management. The same goes for other businesses in the travel sector, such as hotel rooms, cruises, trains, and car rentals.
The downside is that airlines are relatively insensitive to real-time changes in costs, as the next individual fare often increases significantly. Researchers found that even if airlines wanted to raise prices by $100, half the price of an average one-way ticket, they would only raise prices by about 20% because there were no fares available at that price. discovered.
Airlines are now starting to experiment with so-called “continuous revenue management,” for example, assigning 100 different prices to a flight with 100 seats. “If that happens, pricing will vary significantly, but it still won’t target many consumers in the way that airlines envision,” Natan said.
Behind the scenes of airline pricing
One of the study’s strangest findings relates to the process airlines use to set their prices. Natan explained to economists that there was never any reason for companies to behave that way. do not have Raise your prices if the increase will definitely increase your revenue. But this is exactly what airlines do with basically every ticket they sell.
“We talked to all the managers and they said they didn’t know what the pricing team was doing,” Natan says. The pricing team’s job is made more difficult in part by the range of discrete prices they have to work with. “But we found that by selling fewer tickets at higher prices and not blocking future opportunities, we could make more money today. In reality, they set the menu of prices somewhat arbitrary. It seems that you are choosing to.”
Interestingly, the revenue management team has fixed much of this low pricing. After prices are submitted, but before tickets go on sale, this team performs demand forecasts that determine the final price. These forecasts are regularly inflated, reducing the number of low-priced tickets shown to consumers by about 60%.
“It’s very strange,” Nathan admits. “It could simply be the result of different functional teams not communicating.” She speculates that there are two other possible reasons why airlines don’t maximize short-term profits. I am. That’s to build customer loyalty or to avoid regulatory scrutiny.
The future of airline pricing
In the coming years, Natan says, airlines may start adopting more dynamic pricing platforms, and non-business travelers could also benefit from these changes. But for now, searching for undiscovered tricks to finding cheaper fares is largely futile. What is clear is that it is wise not to wait until the last moment. “What I can tell you is that 21 days before his flight, 14 days before his flight, and 7 days before his flight, prices go up significantly,” Natan says. “Please buy your tickets by then.”
References: “Organizational Structure and Pricing: Evidence from Major U.S. Airlines,” Ali Hortaçsu, Olivia R Natan, Hayden Parsley, Timothy Schwieg, and Kevin R Williams, September 27, 2023. quarterly economic journal.
DOI: 10.1093/qje/qjad051
