Are Consumers Strategic? Structural Estimation from the Air-Travel Industry

Date, Time, Venue

19th Dec 2011, Monday at 15.15

Roberts Building 309

University College London

Abstract

Many consumers have learned to delay purchases, anticipating that prices might decrease. Such strategic or forward-looking behavior has attracted increasing attention from various disciplines, including operations management, information systems, marketing, and economics. However, there is currently no empirical evidence of the extent to which this strategic decision-making actually takes place. Combining two unique data sources from the air-travel industry (posted fares data and booking data), we use a structural model to estimate the fraction of strategic consumers in the population, assuming different levels of sophistication in consumers' perception of future prices: perfect foresight and rational expectations. We find that 4.9% to 44.9% of the population are strategic across markets, measured by the 5th and 95th percentiles. Using a non-parametric approach, we further find that most strategic consumers arrive either at the beginning of the booking horizon or close to departure. Finally, our counterfactual analysis shows that, contrary to conventional wisdom, the presence of strategic consumers does not necessarily hurt revenues. Rather, the impact varies by market --- more likely to be negative on business markets, and positive on leisure markets.  As a result, commitment to a non-decreasing pricing strategy benefits business markets but not leisure markets. Among markets benefiting from this pricing strategy, the median revenue improvement is 3.5%, and the quartiles are 1.8% and 5.6%.

Biography

Jun Li is a PhD candidate in Operations Management at the Wharton School, University of Pennsylvania.