The dynamics between price and demand of myopic and strategic consumers in the air transport industry

This thesis sheds light on the relationship between dynamic pricing strategies and consumer demand in the air transport industry. The work is structured around three main research questions, which explore revenue management implementation and the relative influence on consumers’ purchasing behavior. The first research question extends the literature on airline pricing strategies by investigating the presence of quantity price discrimination of a leading European low-cost carrier, finding evidence of a two-part tariff pricing structure in offered fares (i.e., airfares are composed by a fixed fee per reservation and a variable component of price). Interestingly, the application of this kind of strategy is not linear in volume and it generates quantity discounts. Quantity discounts do not substitute the typical pricing discrimination strategies implemented by airlines, rather they are an additional way in which airlines price discriminate consumers. Second, to have an overview of the effectiveness of implementing price discrimination strategies, passengers’ price elasticity of demand is investigated. Outcomes suggest that price elasticity of European low-cost passengers greatly varies across different dimensions (i.e., seasonality, booking and flight characteristics, and served markets). Specifically, price elasticity is higher for reservations made more days in advance, as well as for bookings and departures occurring at weekends. Moreover, flights taking off during lunchtime and in the summer period are characterized by more sensitive passengers with respect to other daily timings and during springtime. As a third step, since price variations are the main outcome of revenue management, their impact is quantified by considering an advanced measure of price volatility, which takes into account past and more recent price changes, as well as the predictability of fare changes over time. Empirical analyses reveal that with higher degrees of price volatility (above and beyond the predicted price trajectory), demand decreases coupled with a significant decrease in price elasticity. Intuitively, price volatility induces lower demand elasticity, whereby consumers may end up paying more, but possibly reducing the overall demand (given the higher price). This insight suggests the need to incorporate the effects of price volatility on consumers’ demand into the classical revenue management model (Expected Marginal Seat Revenue), demonstrating its potential implementation benefit, while capturing the potential harm caused by the presence of strategic consumers. Overall, this thesis gives new explanations on consumers’ behaviour and timing of their purchases: i) consumers’ knowledge of price discrimination strategies helps in their timing decision in order to pay a lower price; ii) acknowledging that only in markets where consumers are price sensitive it is beneficial to implement price drops, price elasticity estimates on different dimensions lead passengers to more easily identify the possibility that airlines plan price variations; and iii) consumers may take advantage of price fluctuations and wait for downward price adjustments.