13 ms·

The Welfare Effects of Dynamic Pricing: Evidence from Airline Markets

77 points by rustoo 5y ago

bannedbybros 5y ago
IG_Semmelweiss 5y ago
I agree with the paper's conclusions. Dynamic pricing is a good thing. But lets take a counterexample: Amazon tried this years ago. They changed pricing on the same sku based on who was shopping for it. The blowback was tremendous. Amazon had to actually back down. My take is that consumers understand and are willing to put up with dynamic pricing for airplane seats because the algorithm is presumably understood. I'm willing to accept that the person sitting next to me on an airplane may have paid 1/3 than the price I paid on my ticket. Maybe the person next to me booked earlier, or booked when the airline had a promo going. Sounds reasonable. But what happens when airlines quietly change algos...to raise prices because of my browsing habits, IP, or CC used? I bet you this is coming
- offbynull 5y ago
  > to raise prices because of my browsing habits, IP, or CC used? How would this work when most people get their flights through aggregators? I search for flights on Google Flights. I imagine Google Flights just hits a database somewhere to get times, prices, number of stops, etc.. rather than share my information with every airline.
  - saiya-jin 5y ago
    I never, ever, super-duper seriously ever again buy airline tickets from anybody but airlines directly. Use to be cheap like that, thinking how clever I was saving few bucks here and there just by using other seller for the same plane. I use search engine to look generally what's the pricing/timing situation but that's it. Then you hit issues, delayed flights etc. and every single helpdesk' first question is: did you book with us or through reseller? If by reseller, please contact them, goodbye and have a nice day. If by us, here is completely brand new ticket for free at best possible available time. Life if too short and I am too poor to deal with such crap when traveling (which is in my case only for vacations, no point ruining them by trying to save few bucks). And quite often direct selling is same price as the other sources.
    - Ekaros 5y ago
      For vacations it might make sense to buy from travel agency at least in EU. Flight cancelled? Don't have to worry about getting refund on other things either. I had vacation booked when covid hit with all restrictions, flight+hotel(my choice) from agency, full refund without any questions asked. So either go with agency, pay the premium for them to sort it out if possible. Or then directly to airline. The results might vary, but per location there might be perks with either.
    - injidup 5y ago
      I have just run into this with Bravofly. Bought two tickets with Singapore airlines. 4 legs were booked. 14 days before the flight I get an SMS saying Singapore Munich is cancelled. I ring through to Bravo and ask them to reschedule a the flight as is required under EU law. No problem sir we are into it. I think nothing of it. 5 days pass. No email and my booking has not changed. I ring again. Why is this taking so long. I was rudely informed to be patient as the "relevant department" ( note this term ) is processing it and it takes some time. 10 minutes later I get an email from bravo. All my flights are cancelled.no to information is provided about the reschedule. I find their webchat app and get in touch. "How can I help you sir?" Starts the conversation which quickly goes downhill. The man informs me that Bravo is not responsible for rescheduling the flight. My contract is with Singapore airlines. "Have a nice day sir" No no no and no....I argue with him for over an hour. Eventually he agrees to escalate and then hangs up on me. I try to contact Singapore airlines but they tell me to go back to Bravo. It's their ticket booking. A day later I call back to Bravo and ask them the status. They just stonewall me. Everything is handled by the "relevant department" and I will get an "email as soon as possible" They refuse to divulge any information. They start pressuring.me to cancel. They promise me a full refund. I say no I want a reschedule. "Ok sure but you will have to wait for the RELEVANT DEPARTMENT." This is nine days before I fly. I've waited now 6 days for any actionable information from Bravo. Nothing comes. Eventually I give in..I book a new flight direct with Singapore airlines. I contact the bravo chat again and ask them to cancel. "Ok sir but we can only refund you the part of the ticket that was cancelled". That is 1/4. I explode..I post the chat log I'd recorded from yesterday showing that I'd been promised a full refund. "Yes sir ... Of course sir.but there will be a 35 euro handling fee" No the fuck there won't be I responded and posted the recorded log where I'd explicitly the day before asked about handling fees and were promised there would be none. I asked when I should expect the refund. "I've notified the RELEVANT DEPARTMENT and they will contact you as soon as possible" At this point I realise their business strategy. They can offer cheaper flights because when everything goes well the customer gets the flight. If however the airline cancels one flight Bravo can then dick the customer around and attempt to find excuses not to pay up. I somehow doubt I will get much of the 1000 euros out of them they owe me.
  - shmatt 5y ago
    From my personal experience that sort of stuff doesn't happen anymore due to aggregators. Prices do change based on the moment you searched, but I've constantly been getting the same price across ITA Matrix / Google Flights / Airline Official Website / Priceline No Incognito or VPN needed What I do still see changing based on different metrics like IP are car rental prices and hotel prices All US car rental companies give much cheaper prices to foreigners. I don't know the reasoning but its absurd, A rental car in Manhattan for Easter weekend will cost you $300/day on kayak.com and $70/day at the same exact branch on kayak.com.hk (this also works on the companies official websites when changing "country of residence")
- mdavis6890 5y ago
  I think the difference in the Amazon example is that it’s about you as an individual, rather than general market circumstances. I think most of us are okay paying a surge rate to Uber when it’s raining at the ballpark (market circumstances), but not just because you are on the way to the hospital (personal circumstances).
  - eganp 5y ago
    Never thought of this distinction before! Thanks for making this distinction. This seems to hold in other contexts. People tend to tolerate price discrimination at an aggregate level (e.g. senior/student discounts) but loathe individual-level price discrimination (e.g. college tuition). I wonder if it's the unfairness or uncertainty
- mfringel 5y ago
  A key differentiator is that airline seats are a perishable good. That is, an empty seat has value until the plane takes off, at which point the value goes to zero. On the flip side, a traveler has an opportunity to be in that seat until the plane takes off, at which point its value is zero. People tend to understand that those values continuously vary with time, and so the price will vary with time. To contrast, books (in specific) and consumer durables (in general) are not perishable goods. The notable exceptions tend to be time-based; try getting chocolates in the heart-shaped box right before Valentine's Day in the US... and then the day after. Since the value of the book doesn't continuously vary with time over the short-run, people don't expect that the price will vary.
  - ccalloway 5y ago
    Tickets for the theater and for concerts are also generally sold for considerably below the price that the market will bear, with enormous effort put into ineffectively preventing resale, despite the tickets being 'perishable' in your sense.
    - colinmhayes 5y ago
      Tickets generally are dynamically priced. If a ticket has high demand it will instantly sell out and be put up for auction on resale sites.
      - ccalloway 5y ago
        By this definition everything that can be resold is dynamically priced. The GP was trying to explain why airline tickets, but not consumer goods, are dynamically priced when sold by the original vendors.
        colinmhayes 5y ago
        Most goods that can be dynamically priced are dynamically priced. The thing is that most goods are not supply constrained. When there is competition and an unlimited supply people will just pretend they have a lower willingness to pay so dynamic pricing doesn't really work.
- atyppo 5y ago
  This already happens on an extent on Delta's website. I've had it happen multiple times where I receive a higher upgrade offer price than others traveling with me on a separate reservation. Other times where even the price of the ticket is different, despite vehement denial from someone in Ed Bastian's office. Hence I frequently use incognito and change my VPN's location to search and get cheapest mileage-based offers since this isn't searchable on Google Flights. Quite scummy to think they're offering higher prices to their more loyal customers (I travel about 50k miles/yr on Delta). Makes me want to become an airline free agent since I'm in NYC and can get direct flights pretty much anywhere.
- tomrod 5y ago
  > Dynamic pricing is a good thing I'm not sure dynamic pricing is necessarily pareto improving (I think this might be what you mean by "is a good thing"? For folks that are learning this lingo, pareto improving -- at least one party better off and none worse off). I'd have to think through it a bit.
  - colinmhayes 5y ago
    Plenty of good things are not pareto improvements. If someone is a little worse off but someone else is much better off that is a good thing.
    - tomrod 5y ago
      I believe that depends on the ethical system you espouse. Egalitarianism, yes. Utilitarianism, not necessarily (so-called utility monster). And so on.
  - hammock 5y ago
    It's definitely not. This is why the welfare effect is described in the abstract as having directionality
- pessimizer 5y ago
  > to raise prices because of my browsing habits, IP, or CC used? Or higher prices because you have Prime, or pricing either intentionally or inadvertently based on race, sex, religion, or sexual orientation?
- JoshTriplett 5y ago
  > My take is that consumers understand and are willing to put up with dynamic pricing for airplane seats because the algorithm is presumably understood. I think consumers put up with dynamic pricing for airline seats because they don't have another option available, and because it's a long-standing practice that didn't change in an era where that change would have generated blowback. > But what happens when airlines quietly change algos...to raise prices because of my browsing habits, IP, or CC used? This has already happened: https://business.time.com/2012/06/26/orbitz-shows-higher-prices-to-mac-users/ https://business.time.com/2012/06/26/orbitz-shows-higher-pri... Orbitz showed higher prices to Mac users because they figured (probably correctly) that Mac use was correlated with willingness to pay more. They stopped that practice when it became widely known, but it wouldn't surprise me at all if others do the same and don't get caught.
tandr 5y ago
Yeah... Problem is they control supply as well. I would agree with the conclusion only if I would fly business destinations only. As it stands right now, I have to buy tickets to Mexico 6-8 months in advance, with no right to cancel them, even if life has other plans all of a sudden.
- mdavis6890 5y ago
  Someone has to take the risk that life happens. You can take that risk (non-refundable) or you can pay the airline a higher price to take that risk (refundable).
  - blunte 5y ago
    But is the extra cost you pay (for that risk) fair relative to the risk of revenue loss for the airlines? I highly doubt that. This is an industry that has a history of ever-increasing executive pay rates with gradual reductions in service quality, gradual increases in incidental fees, frequent bankruptcies, and occasional governmental bail-outs.
    - ccalloway 5y ago
      It bears no relation to the risk of revenue loss for the airline. It is based on demand. An airline runs hundreds of flights a day, and it knows that a certain percentage are going to be less than full. It tries to optimize as best it can. You on the other hand are going to be seriously annoyed if you have to change your plans and you lose hundreds of dollars, maybe a significant proportion of the money you have for your trip. They are going to charge you based on the price you're willing to pay for peace of mind, far lower than the cost to them. After all, most people do use the plane tickets they have booked. The solution is to self-insure by having $1000, or whatever, ready for if you need it for increased travel costs or other emergencies. And try to avoid feeling either anger or regret if you have to change your plans. If you don't have a spare few hundred bucks then this method isn't available to you.
      - 5y ago
em500 5y ago
Some notes for the non-economically schooled readers: - Ungated (working paper) versions are here[1] and here[2] - This was published in Econometrica, one of the top journals in economics. That doesn't mean that the results are true, but it means that the the math and methodology are probably sound. If you want to attack the results, the weaknesses are probably in the (implicit) model assumptions. - In economic lingo, "welfare" means consumer surplus (buyer gets a good deal) + producer surplus (seller makes a profit). Standard academic economics analysis is indifferent wether the producer or consumer gets the profits (i.e. between producers selling at costs and consumers buying cheaper that they'd be willing to pay, and producers maximizing profit while consumers maximum they're willing to pay). "Higher welfare" in dynamic pricing vs uniform pricing means that the sum is higher in dynamic pricing. In this context it basically means that more flights are flown using dynamic pricing than would have been in uniform pricing. Negative externalities from more flights are usually out of scope for a paper like this. - Airlines can adjust prices continuously for the same flight as a response to demand changes, or price discrimination (charge more to those willing to pay more, i.e. business travelers). The paper claims as a key contribution the disentanglement of these motives. I haven't gone through it to see if it's sound, but when since it's published in Econometrica, it will probably take quite some time to fully digest. [1] https://www.nber.org/system/files/working_papers/w28989/w28989.pdf https://www.nber.org/system/files/working_papers/w28989/w289... [2] https://cowles.yale.edu/sites/default/files/files/pub/d21/d2103u2.pdf https://cowles.yale.edu/sites/default/files/files/pub/d21/d2...
- tomrod 5y ago
  Note that journal is Econometrica, not Econometrics, and is widely considered the top journal for quantitative work in economics. (slight nitpick in case OP statement causes confusion). This is the kind of paper that goes a far way to establish tenure. Good job to the author if that is their stage in their career.
  - em500 5y ago
    Noted and corrected, thanks.
- 5y ago
cbdumas 5y ago
Why don't retailers of luxury durable goods use dynamic pricing? Surely Best Buy would love to charge the actual market price (~$800 from a quick eBay search) for a PS5. Sony could just auction batches of consoles to retailers and let them price / promote however they want. Instead they stick to MSRP, leading to shortages at retailers and leaving lots of money on the table for resellers. I don't get it.
- secabeen 5y ago
  Because Sony wants the official retail price to be $X. If you get an allocation from Sony, and then sell at $x+300, you won't get any more allocation.
- HWR_14 5y ago
  Because that nets Sony an extra $150/unit (assuming Best Buy pays 1/2 the unit price). But Sony's customers feel cheated. Customers can handle not getting a unit via a "fair" practice, but they resent the rich explicitly getting better treatment for things like that. Also, they cannot plan a budget. Right now, if you have $500 you have a PS5 eventually. In your world, they buy an Xbox or spend it on something else because they don't want to keep saving and getting priced out. But keep in mind consoles are all network effects, and the real money is on subscriptions and commissions on games. So, Sony gets a one time pop in revenue, fewer units lead to fewer exclusives, leads to more people selecting XBox in the future. I think MS was willing to lose a billion on the first Xbox to get sufficient traction. If we discount inflation entirely and assume that was a reasonable value, Sony would have to sell 6.67 million units to be equal to the cost of losing a console war. And they could always end up pulling a Sega.
woopwoop 5y ago
Are there any estimates on the welfare effects of forbidding buyers from reselling tickets? This has always struck me as one of the more outrageous market distortions one encounters on a regular basis.

77 points by rustoo 5y ago

I agree with the paper's conclusions. Dynamic pricing is a good thing. But lets take a counterexample: Amazon tried this years ago. They changed pricing on the same sku based on who was shopping for it. The blowback was tremendous. Amazon had to actually back down. My take is that consumers understand and are willing to put up with dynamic pricing for airplane seats because the algorithm is presumably understood. I'm willing to accept that the person sitting next to me on an airplane may have paid 1/3 than the price I paid on my ticket. Maybe the person next to me booked earlier, or booked when the airline had a promo going. Sounds reasonable. But what happens when airlines quietly change algos...to raise prices because of my browsing habits, IP, or CC used? I bet you this is coming

offbynull 5y ago
> to raise prices because of my browsing habits, IP, or CC used? How would this work when most people get their flights through aggregators? I search for flights on Google Flights. I imagine Google Flights just hits a database somewhere to get times, prices, number of stops, etc.. rather than share my information with every airline.
- saiya-jin 5y ago
  I never, ever, super-duper seriously ever again buy airline tickets from anybody but airlines directly. Use to be cheap like that, thinking how clever I was saving few bucks here and there just by using other seller for the same plane. I use search engine to look generally what's the pricing/timing situation but that's it. Then you hit issues, delayed flights etc. and every single helpdesk' first question is: did you book with us or through reseller? If by reseller, please contact them, goodbye and have a nice day. If by us, here is completely brand new ticket for free at best possible available time. Life if too short and I am too poor to deal with such crap when traveling (which is in my case only for vacations, no point ruining them by trying to save few bucks). And quite often direct selling is same price as the other sources.
  - Ekaros 5y ago
    For vacations it might make sense to buy from travel agency at least in EU. Flight cancelled? Don't have to worry about getting refund on other things either. I had vacation booked when covid hit with all restrictions, flight+hotel(my choice) from agency, full refund without any questions asked. So either go with agency, pay the premium for them to sort it out if possible. Or then directly to airline. The results might vary, but per location there might be perks with either.
  - injidup 5y ago
    I have just run into this with Bravofly. Bought two tickets with Singapore airlines. 4 legs were booked. 14 days before the flight I get an SMS saying Singapore Munich is cancelled. I ring through to Bravo and ask them to reschedule a the flight as is required under EU law. No problem sir we are into it. I think nothing of it. 5 days pass. No email and my booking has not changed. I ring again. Why is this taking so long. I was rudely informed to be patient as the "relevant department" ( note this term ) is processing it and it takes some time. 10 minutes later I get an email from bravo. All my flights are cancelled.no to information is provided about the reschedule. I find their webchat app and get in touch. "How can I help you sir?" Starts the conversation which quickly goes downhill. The man informs me that Bravo is not responsible for rescheduling the flight. My contract is with Singapore airlines. "Have a nice day sir" No no no and no....I argue with him for over an hour. Eventually he agrees to escalate and then hangs up on me. I try to contact Singapore airlines but they tell me to go back to Bravo. It's their ticket booking. A day later I call back to Bravo and ask them the status. They just stonewall me. Everything is handled by the "relevant department" and I will get an "email as soon as possible" They refuse to divulge any information. They start pressuring.me to cancel. They promise me a full refund. I say no I want a reschedule. "Ok sure but you will have to wait for the RELEVANT DEPARTMENT." This is nine days before I fly. I've waited now 6 days for any actionable information from Bravo. Nothing comes. Eventually I give in..I book a new flight direct with Singapore airlines. I contact the bravo chat again and ask them to cancel. "Ok sir but we can only refund you the part of the ticket that was cancelled". That is 1/4. I explode..I post the chat log I'd recorded from yesterday showing that I'd been promised a full refund. "Yes sir ... Of course sir.but there will be a 35 euro handling fee" No the fuck there won't be I responded and posted the recorded log where I'd explicitly the day before asked about handling fees and were promised there would be none. I asked when I should expect the refund. "I've notified the RELEVANT DEPARTMENT and they will contact you as soon as possible" At this point I realise their business strategy. They can offer cheaper flights because when everything goes well the customer gets the flight. If however the airline cancels one flight Bravo can then dick the customer around and attempt to find excuses not to pay up. I somehow doubt I will get much of the 1000 euros out of them they owe me.
- shmatt 5y ago
  From my personal experience that sort of stuff doesn't happen anymore due to aggregators. Prices do change based on the moment you searched, but I've constantly been getting the same price across ITA Matrix / Google Flights / Airline Official Website / Priceline No Incognito or VPN needed What I do still see changing based on different metrics like IP are car rental prices and hotel prices All US car rental companies give much cheaper prices to foreigners. I don't know the reasoning but its absurd, A rental car in Manhattan for Easter weekend will cost you $300/day on kayak.com and $70/day at the same exact branch on kayak.com.hk (this also works on the companies official websites when changing "country of residence")
mdavis6890 5y ago
I think the difference in the Amazon example is that it’s about you as an individual, rather than general market circumstances. I think most of us are okay paying a surge rate to Uber when it’s raining at the ballpark (market circumstances), but not just because you are on the way to the hospital (personal circumstances).
- eganp 5y ago
  Never thought of this distinction before! Thanks for making this distinction. This seems to hold in other contexts. People tend to tolerate price discrimination at an aggregate level (e.g. senior/student discounts) but loathe individual-level price discrimination (e.g. college tuition). I wonder if it's the unfairness or uncertainty
mfringel 5y ago
A key differentiator is that airline seats are a perishable good. That is, an empty seat has value until the plane takes off, at which point the value goes to zero. On the flip side, a traveler has an opportunity to be in that seat until the plane takes off, at which point its value is zero. People tend to understand that those values continuously vary with time, and so the price will vary with time. To contrast, books (in specific) and consumer durables (in general) are not perishable goods. The notable exceptions tend to be time-based; try getting chocolates in the heart-shaped box right before Valentine's Day in the US... and then the day after. Since the value of the book doesn't continuously vary with time over the short-run, people don't expect that the price will vary.
- ccalloway 5y ago
  Tickets for the theater and for concerts are also generally sold for considerably below the price that the market will bear, with enormous effort put into ineffectively preventing resale, despite the tickets being 'perishable' in your sense.
  - colinmhayes 5y ago
    Tickets generally are dynamically priced. If a ticket has high demand it will instantly sell out and be put up for auction on resale sites.
    - ccalloway 5y ago
      By this definition everything that can be resold is dynamically priced. The GP was trying to explain why airline tickets, but not consumer goods, are dynamically priced when sold by the original vendors.
      - colinmhayes 5y ago
        Most goods that can be dynamically priced are dynamically priced. The thing is that most goods are not supply constrained. When there is competition and an unlimited supply people will just pretend they have a lower willingness to pay so dynamic pricing doesn't really work.
atyppo 5y ago
This already happens on an extent on Delta's website. I've had it happen multiple times where I receive a higher upgrade offer price than others traveling with me on a separate reservation. Other times where even the price of the ticket is different, despite vehement denial from someone in Ed Bastian's office. Hence I frequently use incognito and change my VPN's location to search and get cheapest mileage-based offers since this isn't searchable on Google Flights. Quite scummy to think they're offering higher prices to their more loyal customers (I travel about 50k miles/yr on Delta). Makes me want to become an airline free agent since I'm in NYC and can get direct flights pretty much anywhere.
tomrod 5y ago
> Dynamic pricing is a good thing I'm not sure dynamic pricing is necessarily pareto improving (I think this might be what you mean by "is a good thing"? For folks that are learning this lingo, pareto improving -- at least one party better off and none worse off). I'd have to think through it a bit.
- colinmhayes 5y ago
  Plenty of good things are not pareto improvements. If someone is a little worse off but someone else is much better off that is a good thing.
  - tomrod 5y ago
    I believe that depends on the ethical system you espouse. Egalitarianism, yes. Utilitarianism, not necessarily (so-called utility monster). And so on.
- hammock 5y ago
  It's definitely not. This is why the welfare effect is described in the abstract as having directionality
pessimizer 5y ago
> to raise prices because of my browsing habits, IP, or CC used? Or higher prices because you have Prime, or pricing either intentionally or inadvertently based on race, sex, religion, or sexual orientation?
JoshTriplett 5y ago
> My take is that consumers understand and are willing to put up with dynamic pricing for airplane seats because the algorithm is presumably understood. I think consumers put up with dynamic pricing for airline seats because they don't have another option available, and because it's a long-standing practice that didn't change in an era where that change would have generated blowback. > But what happens when airlines quietly change algos...to raise prices because of my browsing habits, IP, or CC used? This has already happened: https://business.time.com/2012/06/26/orbitz-shows-higher-prices-to-mac-users/ https://business.time.com/2012/06/26/orbitz-shows-higher-pri... Orbitz showed higher prices to Mac users because they figured (probably correctly) that Mac use was correlated with willingness to pay more. They stopped that practice when it became widely known, but it wouldn't surprise me at all if others do the same and don't get caught.

tandr 5y ago

Yeah... Problem is they control supply as well. I would agree with the conclusion only if I would fly business destinations only. As it stands right now, I have to buy tickets to Mexico 6-8 months in advance, with no right to cancel them, even if life has other plans all of a sudden.

mdavis6890 5y ago
Someone has to take the risk that life happens. You can take that risk (non-refundable) or you can pay the airline a higher price to take that risk (refundable).
- blunte 5y ago
  But is the extra cost you pay (for that risk) fair relative to the risk of revenue loss for the airlines? I highly doubt that. This is an industry that has a history of ever-increasing executive pay rates with gradual reductions in service quality, gradual increases in incidental fees, frequent bankruptcies, and occasional governmental bail-outs.
  - ccalloway 5y ago
    It bears no relation to the risk of revenue loss for the airline. It is based on demand. An airline runs hundreds of flights a day, and it knows that a certain percentage are going to be less than full. It tries to optimize as best it can. You on the other hand are going to be seriously annoyed if you have to change your plans and you lose hundreds of dollars, maybe a significant proportion of the money you have for your trip. They are going to charge you based on the price you're willing to pay for peace of mind, far lower than the cost to them. After all, most people do use the plane tickets they have booked. The solution is to self-insure by having $1000, or whatever, ready for if you need it for increased travel costs or other emergencies. And try to avoid feeling either anger or regret if you have to change your plans. If you don't have a spare few hundred bucks then this method isn't available to you.
    - 5y ago

em500 5y ago

Some notes for the non-economically schooled readers: - Ungated (working paper) versions are here[1] and here[2] - This was published in Econometrica, one of the top journals in economics. That doesn't mean that the results are true, but it means that the the math and methodology are probably sound. If you want to attack the results, the weaknesses are probably in the (implicit) model assumptions. - In economic lingo, "welfare" means consumer surplus (buyer gets a good deal) + producer surplus (seller makes a profit). Standard academic economics analysis is indifferent wether the producer or consumer gets the profits (i.e. between producers selling at costs and consumers buying cheaper that they'd be willing to pay, and producers maximizing profit while consumers maximum they're willing to pay). "Higher welfare" in dynamic pricing vs uniform pricing means that the sum is higher in dynamic pricing. In this context it basically means that more flights are flown using dynamic pricing than would have been in uniform pricing. Negative externalities from more flights are usually out of scope for a paper like this. - Airlines can adjust prices continuously for the same flight as a response to demand changes, or price discrimination (charge more to those willing to pay more, i.e. business travelers). The paper claims as a key contribution the disentanglement of these motives. I haven't gone through it to see if it's sound, but when since it's published in Econometrica, it will probably take quite some time to fully digest. [1] https://www.nber.org/system/files/working_papers/w28989/w28989.pdf https://www.nber.org/system/files/working_papers/w28989/w289... [2] https://cowles.yale.edu/sites/default/files/files/pub/d21/d2103u2.pdf https://cowles.yale.edu/sites/default/files/files/pub/d21/d2...

tomrod 5y ago
Note that journal is Econometrica, not Econometrics, and is widely considered the top journal for quantitative work in economics. (slight nitpick in case OP statement causes confusion). This is the kind of paper that goes a far way to establish tenure. Good job to the author if that is their stage in their career.
- em500 5y ago
  Noted and corrected, thanks.
5y ago

cbdumas 5y ago

Why don't retailers of luxury durable goods use dynamic pricing? Surely Best Buy would love to charge the actual market price (~$800 from a quick eBay search) for a PS5. Sony could just auction batches of consoles to retailers and let them price / promote however they want. Instead they stick to MSRP, leading to shortages at retailers and leaving lots of money on the table for resellers. I don't get it.

secabeen 5y ago
Because Sony wants the official retail price to be $X. If you get an allocation from Sony, and then sell at $x+300, you won't get any more allocation.
HWR_14 5y ago
Because that nets Sony an extra $150/unit (assuming Best Buy pays 1/2 the unit price). But Sony's customers feel cheated. Customers can handle not getting a unit via a "fair" practice, but they resent the rich explicitly getting better treatment for things like that. Also, they cannot plan a budget. Right now, if you have $500 you have a PS5 eventually. In your world, they buy an Xbox or spend it on something else because they don't want to keep saving and getting priced out. But keep in mind consoles are all network effects, and the real money is on subscriptions and commissions on games. So, Sony gets a one time pop in revenue, fewer units lead to fewer exclusives, leads to more people selecting XBox in the future. I think MS was willing to lose a billion on the first Xbox to get sufficient traction. If we discount inflation entirely and assume that was a reasonable value, Sony would have to sell 6.67 million units to be equal to the cost of losing a console war. And they could always end up pulling a Sega.

woopwoop 5y ago

Are there any estimates on the welfare effects of forbidding buyers from reselling tickets? This has always struck me as one of the more outrageous market distortions one encounters on a regular basis.