Finance Papers

Document Type

Journal Article

Date of this Version

9-2014

Publication Source

Management Science

Volume

60

Issue

9

Start Page

2114

Last Page

2137

DOI

10.1287/mnsc.2013.1860

Abstract

Consumers often consider delaying a purchase strategically, anticipating that prices might decrease. Combining two unique data sources from the air-travel industry (posted fare data and booking data), we use a structural model to estimate the fraction of strategic consumers in the population, assuming different levels of sophistication in consumers' perception of future prices: perfect foresight and weak- and strong-form rational expectations. We find that 5.2% to 19.2% of the population is strategic across markets, measured by the first and third quartiles. Our intermarket analysis indicates that shorter trips with more attractive outside options are populated with more strategic consumers. Using a nonparametric approach, we further find that most strategic consumers arrive either at the beginning of the booking horizon or close to departure. Finally, our counterfactual analysis shows that, contrary to conventional wisdom, the presence of strategic consumers does not necessarily hurt revenues. Rather, the impact varies by market. Commitment to a nondecreasing pricing strategy is more likely to benefit business markets than leisure markets, or it could even hurt leisure markets. Intermarket analysis shows that city pairs with lower Internet penetration, higher average price, and shorter distances tend to benefit more from such commitment as well.

Copyright/Permission Statement

https://doi.org/10.1287/mnsc.2013.1860

Keywords

econometrics, structural estimation, air travel, strategic customer behavior

Embargo Date

9-20-2014

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Date Posted: 27 November 2017

This document has been peer reviewed.