A Structural Equilibrium Model of Airline Dynamic Pricing under Fixed Capacity

A Structural Equilibrium Model of Airline Dynamic Pricing under Fixed Capacity Kang Jian Doctor of Philosophy in Economics University of Virginia In the airline industry, the capacity on each flight is fixed, and seat revenues are perishable. Therefore, ticket price has a dynamic component due to the impact of price on consumer purchase decisions in the current period and the effect these decisions have on the future inventory level. As a result, airlines implement dynamic pricing strategies to maximize their revenues from their fixed and perishable resources. In this dissertation, I examine four factors that affect airline ticket pricing: capacity, time remaining until departure, competition, and passenger heterogeneity. To identify the most significant factor, I develop a structural model of US airlines. In this model, I assume that there are four types of consumers with individual-specific preferred departure dates and price sensitivities. In each period, each consumer observes the prices of all available flights and makes a purchase decision based on her individual preference. I model each airline as forward-looking and maximizing the total value from its portfolio of flights by choosing optimal prices based on its own and its competitors' inventories and the expected demand.

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