Unveiling the Truth About Low-Cost Airline Ticket Strategies: An Insight from UC Berkeley’s Haas School of Business

A research paper from UC Berkeley’s Haas School of Business critically examines the widely held assumptions about airline ticket pricing tactics. Contrary to popular belief and standard economic theories, airlines tend to operate with a constrained range of fares, do not modify pricing in response to competitors, and exhibit signs of internal coordination issues when determining ticket prices.

The scholarly article, co-authored by Olivia Natan of Berkeley Haas, was published in The Quarterly Journal of Economics and offers unexpected findings regarding the enigmatic subject of airline ticket pricing.

Common tips for finding less expensive airline tickets often include purchasing on a Tuesday, using your browser’s private mode, or employing a VPN to mimic residence in another country. Olivia Natan, an Assistant Professor of Marketing at UC Berkeley’s Haas School of Business, states, “Our empirical data challenges the validity of these popular methods.”

Myths Debunked

Natan, in collaboration with colleagues Ali Hortaçsu and Timothy Schwieg from the University of Chicago, Kevin Williams from Yale, and Hayden Parsley from the University of Texas at Austin, deeply analyzed the pricing architecture and methodologies of a leading U.S. airline. Their findings revealed a system notably inconsistent with what standard economic models would predict and what consumers generally presume.

“Observing the data initially left us puzzled,” Natan notes.

Substitution Effect and Customer Choices

Consider, for instance, the selection of fruit jams at a supermarket. If the price of strawberry jam rises, it is reasonable to anticipate a shift in sales toward raspberry jam, as consumers can easily switch between the two. Similarly, when potential travelers utilize platforms like Google Flights or Kayak, they are presented with a plethora of flight options from a single airline. Most will choose a flight that optimizes between cost and convenience. A price hike for one flight could encourage travelers to opt for a less convenient but cheaper alternative.

However, Natan observes that airlines often neglect this substitution effect. Airlines tend to focus on the pricing of individual flights rather than considering the aggregate impact of pricing on all available options.

Pricing Framework

Even more intriguingly, airlines do not factor in their competitors’ pricing when setting their own fares. One would ordinarily expect price matching in a competitive market. According to Natan, this peculiar approach is the consequence of a unique pricing heuristic airlines employ, known as Expected Marginal Seat Revenue-b (EMSRb). This methodology leads to outcomes that defy consumer expectations.

Contrary to the flexibility seen in other consumer sectors, airlines work with a fixed and often narrow range of possible ticket prices. These prices are set in large intervals, sometimes with a gap of over $100 between them. Airlines have developed global distribution systems to ensure price uniformity across different sales platforms, from travel agents to individual computers.

Natan adds that airlines are generally sluggish in adapting to real-time cost changes, primarily due to the discrete nature of their pricing intervals. The researchers found that airlines only sporadically adjust prices even when circumstances would justify a significant price increase.

Behind the Curtain of Airline Pricing

One of the most startling revelations from the study pertains to how airlines configure their pricing. Natan explains that the conventional wisdom in economics suggests that any price increase that assures a rise in revenue should be implemented. However, airlines frequently do the opposite.

“Conversations with various management teams suggest a lack of cohesion within the pricing department,” says Natan. In actual practice, the selection of prices appears to be somewhat random.

However, it’s worth noting that the revenue management team often rectifies this underpricing. These adjustments happen after the initial pricing but before the tickets are made available to the public, thereby reducing the number of underpriced tickets by approximately 60%.

“It’s rather perplexing and could possibly be attributed to a lack of inter-departmental communication,” Natan speculates. She suggests other plausible reasons for this anomaly might include building customer loyalty or avoiding regulatory scrutiny.

The Future of Airfare Pricing

In the coming years, Natan anticipates that airlines will start to employ more dynamic pricing models, which could benefit non-business travelers. However, the notion that one can find a hidden hack for cheaper fares appears to be largely illusory. What is certain is that prices usually surge 21, 14, and 7 days prior to a flight. “My advice is to secure your tickets before these price hikes,” Natan concludes.

Reference: “Organizational Structure and Pricing: Evidence from a Large U.S. Airline” by Ali Hortaçsu, Olivia R Natan, Hayden Parsley, Timothy Schwieg, and Kevin R Williams, published on September 27, 2023, in The Quarterly Journal of Economics.
DOI: 10.1093/qje/qjad051

Frequently Asked Questions (FAQs) about Airline Ticket Pricing Strategies

More about Airline Ticket Pricing Strategies

• UC Berkeley Haas School of Business Official Website
• The Quarterly Journal of Economics
• Consumer Behavior in Airline Ticket Purchases
• Dynamic Pricing in the Airline Industry
• Understanding Revenue Management in Airlines
• Airlines and Price Discrimination
• Future Trends in Airline Pricing
• Airline Industry Regulations
• Impact of Technology on Airline Ticket Pricing