Easyjet''s dynamic pricing model may sometimes slow the rate at which ticket prices go up, but bargain-hunters who wait until the last minute will invariably be disappointed. That''s the conclusion of new research by Claudio Piga, Marco Alderighi and Alberto Gaggero, to be presented at the Royal Economic Society''s annual conference at the University of Bristol in April 2017.
The study tracks price increases for 37,489 flights offered by the budget carrier, and finds that tiers of ticket pricing rise steadily as seats are sold. That''s because limited ''buckets'' of seats at each price sell out, before new, higher-priced buckets are offered.
For one flight in eight, they researchers find that seat prices went up close to departure date even when no seats were sold, as last-minute buyers are less sensitive to price. But while more seats may be allocated to each lower-tier bucket if the flight is not full, the airline never slashes prices at the last minute. This mean we no longer see those fabled last-minute ticket bargains.
The authors explain: ''Easyjet faces a strong incentive to reduce fares in the attempt to minimise the number of empty seats at take-off. But dropping fares too often would attract the attention of strategic customers, who would postpone purchase, hoping for some last-minute discounts.''
The hidden side of dynamic pricing in airline markets
This study metaphorically ''lifts the bonnet'' of the revenue management engine used by a large European low-cost carrier, EasyJet, to reveal the driving economic forces affecting the online fares posted by the carrier.
Key to the analysis is the fact that carriers do not post only one fare on their reservation system, but a fare for each seat that is still available on the flight. We develop a mathematical model predicting that such fares should be organised in an increasing sequence, starting from the cheapest and ending with the dearest seat. The data confirm this general property, which holds for the entire booking period and for all the 37,489 flights in our sample.
More precisely, the data reveal that the fare sequence includes a series of ''buckets of seats'' – that is, groups of seats that have the same price tag. The size of each bucket varies, so that the overall shape of a fare sequence resembles a ''staircase'' with steps of varying width. The evidence suggests that the ''design of the sequence'' – that is, the fare levels representing the height of each step – is rather fixed: the carrier does not often add a ''new level'' but tends to use the same ones instead.
The fare of the first seat in the sequence is the fare observed by customers as the outcome of an online query. We identify three main forces affecting such a fare:
The first force is that fares move up along the sequence as seats are sold; that is, the observed fare goes up as the plane fills up, or, equivalently, when a bucket is sold out, the seats allocated to the next higher bucket are put on sale; this force is largely responsible for the observed upward trend of fares over time; every time a seat is sold, the fare increases on average by about 2%.
Second, over the last week before departure, we observe a higher likelihood, relative to previous periods, for the seat on sale to be moved to an upper bucket even if no sales have occurred. This happens, every day, in about one flight in every eight. Such a practice suggests that over the last week, the carrier expects that a larger proportion of business people is part of the potential clientele.
Third, the perishable nature of the airline service implies that it faces a strong incentive to reduce fares in the attempt to minimise the number of empty seats at take-off. But dropping fares too often would attract the attention of strategic customers, who would postpone purchase, hoping for some ''last-minute discounts''.
The focus on a sequence allows the identification of ''hidden forms of dynamic pricing'', which may imply that dynamic pricing takes place even if customers cannot detect any change in the online offered fare. This happens when the carrier shifts some seats from higher to lower-priced buckets, thus generating a modification of the fare sequence that is not associated with a change in the offered fare.
For example, imagine there is only one last seat available at the current fare of £68. The airline may decide to shift some of the seats placed in a higher fare bucket to the current bucket; the replenishment of the £68 bucket implies that the offered fare will remain at this level longer, thereby slowing down the rate of increase of the offered fare due to the force illustrated in the first force.
Interestingly, contrary to the common belief that airlines rely on dynamic pricing to charge higher fares, we highlight how dynamic pricing can achieve the opposite effect. Overall, the reallocation of seats across buckets is carried out, per flight, once every two-three days on average, but more frequently between four and two weeks before departure and less in the last ten days.
The combined effect of all these three forces is that a consumer following the evolution of online fares for a given flight, would observe, on average, an upward trajectory.
Claudio Piga, Keele Management School, Keele University, UK
Marco Alderighi, University of Valle d''Aosta, Italy
Alberto Gaggero, University of Pavia, Italy