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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

by 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.
geysersam 5y ago
Isn't the conclusion trivial? With perfect price discrimination, every buyer exposes their exact utility gain from buying the product, that's the price they'll pay for it. Of course the resource will be allocated optimally. Naturally in this situation only the seller will benefit from the transaction. Everyone else is +-0. Utility/"welfare" is maximized but consumers get none of it. And of course, in the end even talking about utility assumes the price someone is willing to pay reflects their utility gain. This is the most fundamental assumption in economics, but it's pretty clear that in the real world this is not the case. Especially for luxury goods such as air travel.
- lotsofpulp 5y ago
  > And of course, in the end even talking about utility assumes the price someone is willing to pay reflects their utility gain. This is the most fundamental assumption in economics, but it's pretty clear that in the real world this is not the case. Especially for luxury goods such as air travel. Why? I would expect luxury goods to reflect utility very accurately since they are not necessary purchases. If you are paying $1k to go travel to Disney World, then that seems like a pretty good signal that the flight to Disney World gave you at least $1k worth of utility.
  - geysersam 5y ago
    Does the $1k to go to Disney land buy the same utility as the $1k average yearly income in Bangladesh? Or the utility a 80th percentile household in the US could buy for the same amount.
    - lotsofpulp 5y ago
      I have never heard of utility to be used as an objective measure. It is subjective, symbolizing an individual’s (perceived) value of a transaction relative to other possible transactions. https://en.wikipedia.org/wiki/Utility https://en.wikipedia.org/wiki/Utility > a utility function that represents a single consumer's preference ordering over a choice set but is not comparable across consumers. This concept of utility is personal and based on choice
clairity 5y ago
> "Standard academic economics analysis is indifferent wether [sic] the producer or consumer gets the profits..." that's an objective-sounding position to take, but it's certainly not, even from a purely detached, academic perspective. in most situations, consumer surplus is better for a market and for the overall economy, because it provides more choice points for more efficient allocation. in the unfortunately rare case of a relatively fair and competitive market, producer surplus can be a net good, making the overall market and economy more efficient, but in practice, companies have shown time and again to be pretty poor allocators of capital because they necessarily take fewer bets with larger amassed asset pools. however, economists generally (implicitly) assume a priori that markets are relatively fair and competitive in their analyses (akin to assuming frictionless infinite planes). all that's to say, size does matter, negatively beyond some optimal point on the economies of scale/scope curves. as such, markets are at their best when populated primarily by small- to medium-sized companies, with no artificial barriers to new entrants (e.g., not the airline industry). no matter the 'prestigiousness' of the journal, seemingly small (implicit) assumptions like this that can have huge implications on results necessitates skepticism toward academic economics.
- bschne 5y ago
  > seemingly small (implicit) assumptions like this that can have huge implications on results necessitates skepticism toward academic economics It mostly just means you need to be very careful in interpreting the results, or be careful when someone uses it to motivate policy prescriptions as they themselves may have a questionable interpretation — like with any academic finding.

by em500 5y ago

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.

geysersam 5y ago

Isn't the conclusion trivial? With perfect price discrimination, every buyer exposes their exact utility gain from buying the product, that's the price they'll pay for it. Of course the resource will be allocated optimally. Naturally in this situation only the seller will benefit from the transaction. Everyone else is +-0. Utility/"welfare" is maximized but consumers get none of it. And of course, in the end even talking about utility assumes the price someone is willing to pay reflects their utility gain. This is the most fundamental assumption in economics, but it's pretty clear that in the real world this is not the case. Especially for luxury goods such as air travel.

lotsofpulp 5y ago
> And of course, in the end even talking about utility assumes the price someone is willing to pay reflects their utility gain. This is the most fundamental assumption in economics, but it's pretty clear that in the real world this is not the case. Especially for luxury goods such as air travel. Why? I would expect luxury goods to reflect utility very accurately since they are not necessary purchases. If you are paying $1k to go travel to Disney World, then that seems like a pretty good signal that the flight to Disney World gave you at least $1k worth of utility.
- geysersam 5y ago
  Does the $1k to go to Disney land buy the same utility as the $1k average yearly income in Bangladesh? Or the utility a 80th percentile household in the US could buy for the same amount.
  - lotsofpulp 5y ago
    I have never heard of utility to be used as an objective measure. It is subjective, symbolizing an individual’s (perceived) value of a transaction relative to other possible transactions. https://en.wikipedia.org/wiki/Utility https://en.wikipedia.org/wiki/Utility > a utility function that represents a single consumer's preference ordering over a choice set but is not comparable across consumers. This concept of utility is personal and based on choice

clairity 5y ago

> "Standard academic economics analysis is indifferent wether [sic] the producer or consumer gets the profits..." that's an objective-sounding position to take, but it's certainly not, even from a purely detached, academic perspective. in most situations, consumer surplus is better for a market and for the overall economy, because it provides more choice points for more efficient allocation. in the unfortunately rare case of a relatively fair and competitive market, producer surplus can be a net good, making the overall market and economy more efficient, but in practice, companies have shown time and again to be pretty poor allocators of capital because they necessarily take fewer bets with larger amassed asset pools. however, economists generally (implicitly) assume a priori that markets are relatively fair and competitive in their analyses (akin to assuming frictionless infinite planes). all that's to say, size does matter, negatively beyond some optimal point on the economies of scale/scope curves. as such, markets are at their best when populated primarily by small- to medium-sized companies, with no artificial barriers to new entrants (e.g., not the airline industry). no matter the 'prestigiousness' of the journal, seemingly small (implicit) assumptions like this that can have huge implications on results necessitates skepticism toward academic economics.

bschne 5y ago
> seemingly small (implicit) assumptions like this that can have huge implications on results necessitates skepticism toward academic economics It mostly just means you need to be very careful in interpreting the results, or be careful when someone uses it to motivate policy prescriptions as they themselves may have a questionable interpretation — like with any academic finding.