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The Welfare Effects of Dynamic Pricing: Evidence from Airline Markets

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Re: The Welfare Effects of Dynamic Pricing: Evidence from Airline Markets

#21

Post by pessimizer »

IG_Semmelweiss wrote: post #3

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…

> 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?

Re: The Welfare Effects of Dynamic Pricing: Evidence from Airline Markets

#22

Post by ccalloway »

mfringel wrote: post #12
IG_Semmelweiss wrote: post #3

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…

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, boo…

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.

Re: The Welfare Effects of Dynamic Pricing: Evidence from Airline Markets

#23

Post by geysersam »

em500 wrote: post #10

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…

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.

Re: The Welfare Effects of Dynamic Pricing: Evidence from Airline Markets

#24

Post by ccalloway »

blunte wrote: post #17
mdavis6890 wrote: post #9

Earlier quoted context omitted.

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).

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.

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.

Re: The Welfare Effects of Dynamic Pricing: Evidence from Airline Markets

#25

Post by colinmhayes »

ccalloway wrote: post #22
mfringel wrote: post #12

Earlier quoted context omitted.

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, boo…

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.

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.

Re: The Welfare Effects of Dynamic Pricing: Evidence from Airline Markets

#26

Post by sokoloff »

injidup wrote: post #15
saiya-jin wrote: post #7

Earlier quoted context omitted.

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…

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 l…

Long before the point you're at, I'd have let my credit card company know to charge back that transaction and the details why. (I do give companies one solid effort to correct things on their end.)

Re: The Welfare Effects of Dynamic Pricing: Evidence from Airline Markets

#27

Post by colinmhayes »

tomrod wrote: post #19
IG_Semmelweiss wrote: post #3

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…

> 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.

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.

Re: The Welfare Effects of Dynamic Pricing: Evidence from Airline Markets

#28

Post by ccalloway »

colinmhayes wrote: post #25
ccalloway wrote: post #22

Earlier quoted context omitted.

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.

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.

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.

Re: The Welfare Effects of Dynamic Pricing: Evidence from Airline Markets

#29

Post by lotsofpulp »

geysersam wrote: post #23
em500 wrote: post #10

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…

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 tal…

> 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.

Re: The Welfare Effects of Dynamic Pricing: Evidence from Airline Markets

#30

Post by colinmhayes »

ccalloway wrote: post #28
colinmhayes wrote: post #25

Earlier quoted context omitted.

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.

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 .

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.
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