Estimating flight-level price elasticities using online airline data: A first step toward integrating pricing, demand, and revenue optimization

The authors estimate flight-level price elasticities using a database of online prices and seat map displays. In contrast to market-level and route-level elasticities reported in the literature, flight-level elasticities can forecast responses in demand due to day-to-day price fluctuations. Knowing how elasticities vary by flight and booking characteristics and in response to competitors’ pricing actions allows airlines to design better promotions. It also allows policy makers the ability to evaluate the impacts of proposed tax increases or time-of-day congestion pricing policies. The authors' elasticity results show how airlines can design optimal promotions by considering not only which departure dates should be targeted, but also which days of the week customers should be allowed to purchase. Additionally, the authors show how elasticities can be used by carriers to strategically match a subset of their competitors’ sale fares. Methodologically, the authors use an approach that corrects for price endogeneity; failure to do so results in biased estimates and incorrect pricing recommendations. Using an instrumental variable approach to address this problem the authors find a set of valid instruments that can be used in future studies of air travel demand. The authors conclude by describing how the authors' approach contributes to the literature, by offering an approach to estimate flight-level demand elasticities that the research community needs as an input to more advanced optimization models that integrate demand forecasting, price optimization, and revenue optimization models.

Language

  • English

Media Info

Subject/Index Terms

Filing Info

  • Accession Number: 01535455
  • Record Type: Publication
  • Files: TRIS
  • Created Date: Aug 12 2014 11:12AM