On the Effect of Strategic Consumer Behavior: Pricing Evidence From the Airline Industry

Abstract

The operations literature has increasingly accounted for the presence of strategic consumer behavior. Theory suggests that such a behaviour exposes firms to intertemporal competition and exerts downwards pressure on prices. However, little evidence exists to demonstrate the outcome effect and the magnitude effects of such consumer behavior. This paper fills this gap by providing evidence for the effects of strategic consumer behaviour supported by online decision support tools. Online decision support tools that provide consumers with information about future distributions of prices support strategic consumer behavior. This paper studies whether the availability of such information affects transacted prices. We conduct an empirical analysis in the context of the airline industry, where airfares are associated with frequent changes. We study the effect at the route level and find significant price differences between routes for which airfare prediction information is available, and routes without airfare prediction information. We find that the availability of information about future fare distributions is associated with lower transacted airfares. This effect was consistent across the different fare percentiles and amounted to transactions with prices approximately 3% lower. We further find that while the magnitude of the effect is most profound shortly after route fare prediction information is introduced, the negative effect on transacted airfares persists in the long run. Interestingly, we do not find evidence that low cost carriers are affected by such availability of information, whereas legacy carriers are affected across all fare percentiles. Our results lend support to the notion that price prediction decision tools make a statistically significant economic impact. Presumably, consumers are able to exploit the information available online and behave more strategically.