Price volatility of revenue managed goods: Implications for demand and price elasticity

Abstract

Revenue management practices are widely employed in various sectors. These mechanisms dynamically adjust prices observed by consumers typically through the control of price classes and their availability. As such, these pricing environments tend to exhibit some predictable behaviors as the product approaches the expiration or consumption date but may also result in varying degrees of price volatility. Such price paths may ultimately alter consumer behavior, e.g., via delayed purchase timing (i.e., strategic behavior) or different willingness to pay. Accordingly, we assess consumers’ responses to the realized price changes induced by revenue management mechanisms, using fare and sales data from aviation markets. Our empirical analyses reveal that price elasticity decreases (in absolute terms) in the degree of price volatility, whereas the realized demand is lower when price volatility is higher. This suggests that as prices become more volatile, consumers become more oblivious to these price fluctuations and may end up paying more for the products—thereby confirming and generalizing a behavior previously documented for consumer packaged goods (CPGs), which follow dramatically different pricing regimes. While this may suggest support for higher and more volatile prices, we find that given the higher prices, the overall demand decreases, highlighting a delicate trade-off firms face. To distill the insights from the empirical analyses, we formulate two hypotheses, which we test in a laboratory setting by means of an ad hoc experiment.