Managing Airfares Under Competition: Insights from a Field Experiment

Abstract

Airfares evolve dynamically, giving rise to a so-called price path. This price path is controlled via two levers: (i) a fare ladder, which defines a set of airfares before the selling season, and (ii) revenue management algorithms, which control how fares evolve along the ladder during the season. We hypothesize that the current policies to control both levers—which do not account for quality differences between competing airlines—give rise to an inefficient price path and, accordingly, a loss of potential revenue. We substantiate this hypothesis via a field experiment. By partnering with an airline, we introduced quality considerations in the design of fare ladders, across 5,000 itineraries, to show that current ladder-design policies indeed lead to a suboptimal price path. We also show that this inefficiency can be mitigated by incorporating quality differences between competing airlines. This creates a smoother (and more profitable) price path. This paper was accepted by Vishal Gaur, operations management.