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«Steven L. Puller1 and Lisa M. Taylor2 August 2012 Abstract This paper identifies a source of price discrimination utilized by airlines – price ...»

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Price Discrimination by Day-of-Week of Purchase:

Evidence from the U.S. Airline Industry

Steven L. Puller1 and Lisa M. Taylor2

August 2012

Abstract

This paper identifies a source of price discrimination utilized by airlines – price

discrimination based on the day-of-the-week that a ticket is purchased. Using unique

transaction data, we compare tickets on the same airline and route that are purchased on

different days of the week, after controlling for the day of week of travel, the ticket restrictions, the demand characteristics of the flights, and the number of days in advance that the ticket is purchased. We find that fares are 5% lower when purchased on the weekend. We conjecture that this is a form of price discrimination. If airlines believe that weekend purchasers are more likely to be price-elastic leisure travelers, then they may offer lower prices on weekends when the mix of purchasing customers makes demand more price elastic. This conjecture is supported by the finding that the weekend purchase effect is distinctly larger on routes with a mixture of both business and leisure customers than on routes that disproportionately serve leisure customers. We illustrate that this pricing practice can have important impacts on airline profits. These results have implications for other industries that have the ability to change prices daily based upon the types of customers who purchase on a specific day.

JEL codes: L1, L8, L9 Texas A&M University and NBER. Corresponding author. Email: puller@econmail.tamu.edu Email: lisamari.taylor@gmail.com. We thank Volodymyr Bilotkach, Alex Brown, Richard Dunn, Diego Escobari, Brad Larsen, Adi Mayer, Claudio Piga, Steve Wiggins, the associate editor, and an anonymous referee for very helpful comments.

1. Introduction It is well-known that airlines use a variety of mechanisms to price discriminate between customers with different willingness to pay for travel. The existing theoretical and empirical literature has investigated several of these mechanisms including advance purchase restrictions, non-refundability, minimum stay requirements, and Saturday night stay requirements. Advance purchase restrictions can be used to segment consumers by their value of time (Gale and Holmes (1993)) and may be sold disproportionately to customers with low valuation (Dana (1998)). Tickets with Saturday night stay restrictions and other travel and refundability restrictions have lower fares, suggesting that ticket restrictions are used to price discriminate (Stavins (2001); Puller, Sengupta, and Wiggins (2009)).

However, the literature has not studied whether airlines segment customers by the day-of-week of purchase. In principle, this could bea valuable segmenting device.

Travelers who purchase on the weekend (but travel any day of the week) may have different price elasticities than those who purchase during the week. Moreover, it would be very feasible to implement “day-of-week-of-purchase” pricing because airlines have the ability to dynamically change prices daily using sophisticated computer reservation systems. Current revenue management systems used by airlines allow revenue management analysts to reassess pricing daily during the booking process.3 In this paper, we make a simple and straightforward contribution to the literature.

We find that airlines charge lower fares for observably similar tickets based on the daySee Belobaba (2009) for a description of revenue management systems used by major carriers.

of-week of purchase, and that this phenomenon is consistent with price discrimination.

This finding is important in its own right because airlines are increasingly using complex pricing schemes, and revenue management systems are becoming progressively more sophisticated. This analysis provides insights into the mechanisms of airline pricing.

Our finding also has implications for a variety of other industries in which sophisticated pricing schemes can be applied. For example, the revenue management systems developed for airlines are being deployed in other hospitality industries including hotels, rental cars, cruise lines, and trains. And more generally, the study of price discrimination by time of purchase could have implications for e-commerce. The dynamic pricing of online retail markets could take advantage of changing prices based on the demand elasticities of consumers likely to be purchasing on any given day or specific times of the day. Although the general topic of intertemporal price discrimination has received considerable attention in the literature, this is the first paper to our knowledge to empirically investigate price discrimination based on day-of-week of purchase that is independent of the actual day of consumption.4 One obstacle to identifying whether airlines price differently on specific days of the week is obtaining sufficiently detailed data in order to address various selection issues. For example, travelers purchasing on the weekend could pay less because they choose tickets with more restrictions or fly on less popular flights; such selection behavior could lead one to incorrectly conclude that airlines set different fares on Of course, differential pricing based on day of consumption is widely studied in both the theoretical and empirical literature; for example, see the literature on peak-load pricing.





weekends. One would need to control for a variety of ticket characteristics to accurately assess whether airlines price differently on weekends. The most common data used in existing airline pricing research – the U.S. Department of Transportation’s Airline Origin and Destination Survey (DB1B) – do not include purchase or departure date nor ticket restrictions or load factors; thus, it is not adequate to properly control for other factors that could affect pricing. Likewise, data on posted airfares gathered via webscraping are not sufficient to address this issue unless the data contain flight times and ticket restrictions.5 We use a unique new dataset of ticket transactions to overcome many of these obstacles. Our data include individual ticket restrictions and information on the load factors of the itinerary’s flights. We illustrate the general phenomenon of the weekend pricing effect in Figure 1. This figure plots the mean fare paid by the day-of-week of purchase for a set of “restricted” tickets that involve travel on a weekday.6 Fares are distinctly lower when the ticket is purchased on Saturday or Sunday. This figure uses only a small subset of the controls that we use in the formal regressions. As we show below, even after controlling for a large set of ticket restrictions and load factors, tickets purchased on weekends are sold at fares that are 5% lower than fares purchased on weekdays. We interpret this finding as differential pricing of weekend purchases.

One notable exception with detailed data on posted fares is Alderighi, Nicolini, and Piga (2012). A paper documenting high frequency pricing phenomena is Bilotkach, Gorodnichenko, and Talavera (2010).

“Restricted” here is defined as a ticket that is non-refundable, not full fare coach, and including a travel restriction. More detailed controls for ticket restrictions and flight characteristics are included in the formal regressions below.

We show that this empirical regularity is consistent with price discrimination.

Routes with a larger share of business travelers are likely to have a different composition of passengers purchasing on weekends versus weekdays, creating incentives for airlines to lower fares on weekends when the demand is more price elastic. We find that the weekend purchase effect is 7% on routes that are a mix of business and leisure travelers while the effect is 2% on routes that disproportionately serve leisure travelers. We argue that this is highly suggestive that airlines implement price discrimination by the day-ofweek of purchase. In the final section, we show that the pricing strategy could have notable effects on airline profits. Our results differ from the only other paper that investigates a day of purchase effect in airlines. Mantin and Koo (2010) analyze a collection of fares from Farecast.com and find that, for a given route, average price is not affected by purchase day of the week but that price dispersion is higher Friday through Sunday. The differences between our findings and those of Mantin and Koo most likely arise from fundamental differences in the data. Mantin and Koo use posted online fares while we use transacted fares. Our data make it possible to account for factors not controlled for by Mantin and Koo, including ticket restrictions and flightlevel load factors.

2. Methodology Our empirical strategy is to test whether tickets transacted on weekends have different mean fares than tickets transacted on weekdays, after controlling for a large set of factors that could reflect weekend purchasers choosing tickets and flights that are observably different. It is critical to control for a host of possible selection issues so that any fare differences can be attributed to supply side behavior.

It is straightforward to see why selection issues could complicate inference. As we show with data below, the unconditional mean fare for weekday purchases (Monday through Friday) is $365, compared with $290 for tickets purchased on the weekend (Saturday and Sunday). Although the mean fare is lower for weekend purchasers, this could reflect the types of tickets purchased by weekend purchasers rather than airlines pricing tickets differently on weekends. Customers purchasing on weekends may be more likely to purchase tickets for off-peak travel times or tickets for more restricted travel. Theoretical work has shown that airlines may have incentives to charge higher prices on flights with higher demand (Gale and Holmes (1992, 1993)) or on flights with more demand uncertainty (Dana (1999)). Likewise, weekend purchasers may buy tickets further in advance than weekday purchasers. The number of days in advance of departure that the ticket is purchased has been shown to have a significant impact on price, with ticket prices increasing as departure nears. This price increase is most dramatic in the last 7-14 days before departure.7 These factors could confound a weekend purchase effect if tickets purchased on weekends are cheaper only because they are for travel during periods of lower or more certain demand, or if they are purchased further in advance than tickets bought on Monday through Friday.

See Stavins (2001); Pels and Rietveld (2004); Puller, Sengupta and Wiggins (2009); and Mantin and Koo (2010).

To address this concern, we include a rich set of variables to control for these confounding factors. In all specifications, we include carrier-route fixed effects to control for the effect on pricing of factors specific to the route and carrier such as the presence of low-cost carriers on the route, the route’s concentration, and the dominance of the carrier on a specific route. As a result, all results investigate the variation in pricing within the same carrier on the same route.

First, we include controls for the number of days that the itinerary was purchased before departure, so that any inference is conditional on tickets purchased the same number of days in advance.

Second, we control for various measures of demand for the specific flights involved in an individual itinerary. We include three different metrics of the itinerary flights’ “load factor” (i.e. the fraction of the flight’s seats that are occupied), as we describe in more detail in the data section below. We include measures of the ex ante expected load factor for the specific flight, the ex post realized load factor, and the load factor as of the date a ticket is purchased. To control for any residual variation in demand or demand uncertainty, we control for a variety of factors for each flight segment of the itinerary: the week of the year, the day of the week of travel, and the time of day of travel.

Third, we control for ticket restrictions that may be used to segment customers using other forms of price discrimination. Airlines can use ticket restrictions to discriminate between business customers with low price elasticities and leisure customers with higher price elasticities. With most restrictions, consumers face a tradeoff between price and flexibility of travel plans. As a result, one would expect airlines to offer lower fares on more restricted tickets that target customers who are more price elastic. We include indicators of whether the ticket includes some form of advance purchase requirement, travel restriction, or length of stay restriction. Also, we include whether the itinerary included a Saturday night stayover and whether the ticket was refundable. Finally, we include an indicator of whether the ticket was “full fare coach” because such tickets may allow changes in reservations or be eligible for upgrade and additional frequent flyer benefits.

The resulting baseline model can be written as:

(1) Log(Fare)i = β0 + β1WeekendPurchasei + β2AdvancePurchaseDaysi + β3LoadFactorsi + β4Timingi + β5Restrictionsi + β6Carrier-RouteFixedEffectsi + εi where subscript i indicates an individual itinerary. The variables included in AdvancePurchaseDaysi, LoadFactorsi, Timingi, and Restrictionsi are described with the results of the model estimation. WeekendPurchasei is an indicator of whether the ticket was purchased on a Saturday or Sunday; β1 is interpreted as the percentage by which a ticket purchased on the weekend is priced lower than an observably similar ticket purchased on a weekday.



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