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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

#51

Post by eganp »

mdavis6890 wrote: post #6
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…

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).

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

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

#53

Post by JoshTriplett »

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…

> 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-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.

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

#54

Post by verall »

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 .

Other comments are also explaining; but in the modern day concert tickets _are_ dynamically priced, with stubhub (owned by) and ticketmaster set up to be the "bad guy".

Popular concerts sell out very fast and are immediately being sold on stubhub. Not all of these tickets sold on stubhub are actual resales by consumers or scalpers, but are typically mass purchases negotiated by ticketmaster ahead of time.

Superfans glued to artist social media will get special promo codes which unlock tickets that are not otherwise available. This makes sense because they are the most likely to spend the difference on merch.

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

#55

Post by solveit »

geysersam wrote: post #32
lotsofpulp wrote: post #29

Earlier quoted context omitted.

> 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 payi…

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.

> even talking about utility assumes the price someone is willing to pay reflects their utility gain

It does. It reflects their utility gain relative to the utility they gain by spending that money somewhere else, or just keeping the money for the future. People not made of straw do not generally believe that the price someone is willing to pay reflects somebody else's utility. Nor are they unaware of the tendency for marginal utility to decrease.

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

#56

Post by solveit »

lotsofpulp wrote: post #40
geysersam wrote: post #32

Earlier quoted context omitted.

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.

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 > 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

Philosophers spend a lot of time trying to figure out a way to define an objective measure of utility that can be compared across different people. This is necessary for many formulations of utilitarianism. And probably many HN commenters are more familiar with the word in this context. That economists use the same word with a much more limited scope does tend to detract from discussions like this, I feel.

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

#57

Post by lotsofpulp »

solveit wrote: post #56
lotsofpulp wrote: post #40

Earlier quoted context omitted.

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 > 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

Philosophers spend a lot of time trying to figure out a way to define an objective measure of utility that can be compared across different people. This is necessary for many formulations of utilitarianism. And probably many HN commenters are more familiar with the word in this context. That economists use the same word with a much more limited scope does tend to detract from discussions like this, I feel.

This discussion is specifically about economics, linked to an article in a prominent economics publication.

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

#58

Post by HWR_14 »

cbdumas wrote: post #20

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.

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.

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

#59

Post by geysersam »

lotsofpulp wrote: post #40
geysersam wrote: post #32

Earlier quoted context omitted.

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.

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 > 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

The paper talks about maximizing "welfare" what is that if not an objective measure of utility?

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

#60

Post by geysersam »

lotsofpulp wrote: post #40
geysersam wrote: post #32

Earlier quoted context omitted.

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.

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 > 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

Of course utility is used as an objective measure. That's the basic foundation of utilitarianism, and utilitarianism is the ethical foundation of market economics.
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