[en] Revenue management practices are widely employed in various sectors. These mechanisms dynamically adjust prices observed by consumers typically through the control of price classes and their availability. As such, these pricing environments tend to exhibit some predictable behaviors as the product approaches the expiration or consumption date but may also result in varying degrees of price volatility. Such price paths may ultimately alter consumer behavior, e.g., via delayed purchase timing (i.e., strategic behavior) or different willingness to pay. Accordingly, we assess consumers’ responses to the realized price changes induced by revenue management mechanisms, using fare and sales data from aviation markets. Our empirical analyses reveal that price elasticity decreases (in absolute terms) in the degree of price volatility, whereas the realized demand is lower when price volatility is higher. This suggests that as prices become more volatile, consumers become more oblivious to these price fluctuations and may end up paying more for the products—thereby confirming and generalizing a behavior previously documented for consumer packaged goods (CPGs), which follow dramatically different pricing regimes. While this may suggest support for higher and more volatile prices, we find that given the higher prices, the overall demand decreases, highlighting a delicate trade-off firms face. To distill the insights from the empirical analyses, we formulate two hypotheses, which we test in a laboratory setting by means of an ad hoc experiment.
Precision for document type :
Review article
Disciplines :
Production, distribution & supply chain management
Author, co-author :
Morlotti, Chiara ; Department of Management, Information and Production Engineering, University of Bergamo, Italy
MANTIN, Binyamin ; University of Luxembourg > Faculty of Law, Economics and Finance (FDEF) > Department of Economics and Management (DEM) > LCL
Malighetti, Paolo ; Department of Management, Information and Production Engineering, University of Bergamo, Italy
Redondi, Renato; Department of Management, Information and Production Engineering, University of Bergamo, Italy
External co-authors :
yes
Language :
English
Title :
Price volatility of revenue managed goods: Implications for demand and price elasticity
We would like to express our sincere gratitude to the anonymous reviewers for their constructive suggestions that have greatly improved the quality of our manuscript. We would like to thank Prof. Martin Dresner for his invaluable feedback on an earlier version of our work.
scite shows how a scientific paper has been cited by providing the context of the citation, a classification describing whether it supports, mentions, or contrasts the cited claim, and a label indicating in which section the citation was made.
Bibliography
Acuna-Agost, R., Thomas, E., Lhéritier, A., Price elasticity estimation for deep learning-based choice models: An application to air itinerary choices. Journal of Revenue and Pricing Management 20 (2021), 213–226, 10.1057/s41272-021-00308-z.
Aflaki, A., Feldman, P., Swinney, R., Becoming strategic: Endogenous consumer time preferences and multiperiod pricing. Operations Research 68 (2020), 1116–1131, 10.1287/opre.2019.1937.
Alderighi, M., Gaggero, A.A., Piga, C.A., The Hidden side of dynamic pricing: evidence from the airline market. Working Paper, 2018, 10.2139/ssrn.3085585.
Anderson, C.K., Blair, M., Performance Monitor: The opportunity costs of revenue management. Journal of Revenue and Pricing Management 24:2 (2004), 353–367, 10.1057/PALGRAVE.RPM.5170083 2004.
Baucells, M., Osadchiy, N., Ovchinnikov, A., Behavioral anomalies in consumer wait-or-buy decisions and their implications for markdown management. Operations Research 65 (2017), 357–378, 10.1287/opre.2016.1547.
Brons, M., Pels, E., Nijkamp, P., Rietveld, P., Price elasticities of demand for passenger air travel: A meta-analysis. Journal of Air Transport Management 8 (2002), 165–175, 10.1016/S0969-6997(01)00050-3.
Cachon, G.P., Swinney, R., Purchasing, pricing, and quick response in the presence of strategic consumers. Management Science 55 (2009), 497–511, 10.1287/mnsc.1080.0948.
Chen, D.L., Schonger, M., Wickens, C., oTree—An open-source platform for laboratory, online, and field experiments. Journal of Behavioral and Experimental Finance 9 (2016), 88–97, 10.1016/J.JBEF.2015.12.001.
Chen, M., Chen, Z.-L., Recent developments in dynamic pricing research: Multiple products, competition, and limited demand information. Production and Operations Management 24 (2015), 704–731, 10.1111/poms.12295.
Cheng, L.L., Monroe, K.B., An appraisal of behavioral price research (part 1): Price as a physical stimulus. AMS Review 3 (2013), 103–129, 10.1007/s13162-013-0041-1.
Cooper, W.L., Homem-de-Mello, T., Kleywegt, A.J., Models of the spiral-down effect in revenue management. Operations Research 54:5 (2006), 968–987, 10.1287/opre.1060.0304.
Dasu, S., Tong, C., Dynamic pricing when consumers are strategic: Analysis of posted and contingent pricing schemes. Europian Journal of Operational Research 204 (2010), 662–671, 10.1016/J.EJOR.2009.11.018.
Davis, D.D., Holt, C.A., Experimental economics. 2021, Princeton university press.
De Maeyer, P., Estelami, H., Applying the peak-end rule to reference prices. Journal of Product & Brand Management 22 (2013), 260–265, 10.1108/JPBM-04-2013-0290.
Den Boer, A.V., Dynamic pricing and learning: Historical origins, current research, and new directions. Surveys in Operations Research and Management Science, 2015, 10.1016/j.sorms.2015.03.001.
Den Boer, A.V., Zwart, B., Dynamic pricing and learning with finite inventories. Operations Research 63:4 (2015), 965–978, 10.1287/OPRE.2015.1397.
Den Boer, A.V., Zwart, B., Simultaneously learning and optimizing using controlled variance pricing. Management Science 60:3 (2013), 770–783, 10.1287/MNSC.2013.1788.
Feng, Y., Gallego, G., Perishable asset revenue management with Markovian time dependent demand intensities. Management Science 46 (2000), 941–956, 10.1287/mnsc.46.7.941.12035.
Fibich, G., Gavious, A., Lowengart, O., The dynamics of price elasticity of demand in the presence of reference price effects. Journal of the Academy of Marketing Science 33 (2005), 66–78, 10.1177/0092070304267108.
Fisher, M., Gallino, S., Li, J., Competition-based dynamic pricing in online retailing: A methodology validated with field experiments. Management Science 64 (2018), 2496–2514, 10.1287/mnsc.2017.2753.
Gallego, G., van Ryzin, G., Optimal dynamic pricing of inventories with stochastic demand over finite horizons. Management Science 40 (1994), 999–1020, 10.1287/mnsc.40.8.999.
Gerardi, K.S., Shapiro, A.H., Does competition reduce price dispersion? New evidence from the airline industry. Journal of Political Economy 117 (2009), 1–37, 10.1086/597328.
Gillen, D., Mantin, B., Price volatility in the airline markets. Transportation Research Part E 45 (2009), 693–709, 10.1016/j.tre.2009.04.014.
Gillen, D., Morrison, W., Stewart, C., 2003. Air travel demand elasticities: Concepts, issues and measurement.
Gönsch, J., How much to tell your customer? – A survey of three perspectives on selling strategies with incompletely specified products. Europian Journal of Operational Research 280 (2020), 793–817, 10.1016/j.ejor.2019.02.008.
Granados, N., Kauffman, R.J., Lai, H., Lin, H.C., À la carte pricing and price elasticity of demand in air travel. Decision Support System 53 (2012), 381–394, 10.1016/j.dss.2012.01.009.
Hofer, C., Windle, R.J., Dresner, M.E., Price premiums and low cost carrier competition. Transportation Research Part E 44 (2008), 864–882, 10.1016/j.tre.2007.03.004.
Janiszewski, C., Lichtenstein, D.R., A range theory account of price perception. The Journal of consumer research 25 (1999), 353–368, 10.1086/209544.
Jedidi, K., Mela, C.F., Gupta, S., Managing advertising and promotion for long-run profitability. Marketing Science 18 (1999), 1–22, 10.1287/mksc.18.1.1.
Johnson, M.D., Anderson, E.W., Fornell, C., Rational and adaptive performance expectations in a customer satisfaction framework. The Journal of consumer research 21 (1995), 695–707, 10.1086/209428.
Kalyanaram, G., Little, J.D.C., An Empirical Analysis of Latitude of Price Acceptance in Consumer Package Goods. The Journal of consumer research, 21, 1994, 408, 10.1086/209407.
Klein, R., Koch, S., Steinhardt, C., Strauss, A.K., A review of revenue management: Recent generalizations and advances in industry applications. Europian Journal of Operational Research 284 (2020), 397–412, 10.1016/J.EJOR.2019.06.034.
Koenigsberg, O., Muller, E., Vilcassim, N.J., EasyJet® pricing strategy: Should low-fare airlines offer last-minute deals?. Quant Mark Econ 6 (2008), 279–297, 10.1007/s11129-007-9036-2.
Kumar, R., Li, A., Wang, W., Learning and optimizing through dynamic pricing. Journal of Revenue and Pricing Management 17 (2018), 63–77, 10.1057/S41272-017-0120-2.
Lazear, E.P., Retail Pricing and Clearance Sales. American Economic Review 76 (1986), 14–32.
Li, J., Granados, N., Netessine, S., Are consumers strategic? Structural estimation from the air-travel industry. Management Science 60 (2014), 2114–2137, 10.1287/mnsc.2013.1860.
Malighetti, P., Paleari, S., Redondi, R., Pricing strategies of low-cost airlines: The Ryanair case study. Journal of Air Transport Management 15 (2009), 195–203, 10.1016/j.jairtraman.2008.09.017.
Mantin, B., Gillen, D., The hidden information content of price movements. Europian Journal of Operational Research 211 (2011), 385–393, 10.1016/J.EJOR.2010.12.017.
Mantin, B., Rubin, E., Price volatility and market performance measures: The case of revenue managed goods. Transportation Research Part E 120 (2018), 35–50, 10.1016/j.tre.2018.10.005.
Marcus, B., Anderson, C.K., Revenue management for low-cost providers. Europian Journal of Operational Research 188 (2008), 258–272, 10.1016/J.EJOR.2007.04.010.
Mayhew, G.E., Winer, R.S., An empirical analysis of internal and external reference prices using scanner data. The Journal of consumer research, 19, 1992, 62, 10.1086/209286.
McAfee, R.P., Te Velde, V., Dynamic pricing with constant demand elasticity. Production and Operations Management 17 (2008), 432–438, 10.3401/poms.1080.0041.
Morlotti, C., Cattaneo, M., Malighetti, P., Redondi, R., Multi-dimensional price elasticity for leisure and business destinations in the low-cost air transport market: Evidence from easyJet. Tourism Management, 61, 2017, 10.1016/j.tourman.2017.01.009.
Mumbower, S., Garrow, L.A., Higgins, M.J., Estimating flight-level price elasticities using online airline data: A first step toward integrating pricing, demand, and revenue optimization. Transportation Research Part A 66 (2014), 196–212, 10.1016/j.tra.2014.05.003.
Murthi, B.P.S., Haruvy, E., Zhang, H., The effect of variability in price on consumer brand choice. Review of Marketing Science, 5, 2007, 10.2202/1546-5616.1071.
Muth, J.F., Rational expectations and the theory of price movements. Economics Journal Economics Social, 1961, 315–335, 10.2307/1909635.
Nasiry, J., Popescu, I., Dynamic pricing with loss-averse consumers and peak-end anchoring. Operations Research 59 (2011), 1361–1368.
Osadchiy, N., Bendoly, E., Are Consumers Really Strategic? Implications from an Experimental Study. Working Paper, 2015, 10.2139/ssrn.2593184.
Oum, T.H., Waters, W.G., Yong, J.S., Concepts of price elasticities of transport demand and recent empirical estimates: An interpretative survey. J Transp Econ Policy 26 (1992), 139–154, 10.4324/9780203985359-10.
Pauwels, K., Srinivasan, S., Franses, P.H., When do price thresholds matter in retail categories?. Marketing Science 26 (2007), 83–100, 10.1287/mksc.1060.0207.
Perera, S., Tan, D., In search of the “Right Price” for air travel: First steps towards estimating granular price-demand elasticity. Transportation Research Part A 130 (2019), 557–569, 10.1016/J.TRA.2019.09.013.
Rajendran, K.N., Tellis, G.J., Contextual and temporal components of reference price. Journal of Marketing 58 (1994), 22–34, 10.1177/002224299405800102.
Salanti, A., Malighetti, P., Redondi, R., Low-cost pricing strategies in leisure markets. Tourism Management 33 (2012), 249–256, 10.1016/j.tourman.2011.03.003.
Smyth, M., Pearce, B., Air travel demand. Measuring the responsiveness of air travel demand to changes in prices and incomes. IATA Econ Brief, 9, 2008.
Soysal, G.P., Krishnamurthi, L., Demand dynamics in the seasonal goods industry: An empirical analysis. Marketing Science 31 (2012), 293–316, 10.1287/mksc.1110.0693.
Talluri, K., Van Ryzin, G., Revenue management under a general discrete choice model of consumer behavior. Management Science, 2004, 10.1287/mnsc.1030.0147.
Van Ryzin, G., McGill, J., Revenue management without forecasting or optimization: An adaptive algorithm for determining airline seat protection levels. Management Science 46 (2000), 760–775, 10.1287/mnsc.46.6.760.11936.
Wang, N., Zhang, T., Zhu, X., Li, P., Online-offline competitive pricing with reference price effect. Journal of the Operational Research Society 72 (2021), 642–653, 10.1080/01605682.2019.1696154.
Weaver, R.A.Y., Frederick, S., A reference price theory of the endowment effect. Journal of Marketing Research 49 (2012), 696–707, 10.1509/jmr.09.0103.
Wei, M.M., Zhang, F., Recent research developments of strategic consumer behavior in operations management. Computers & Operations Research, 2018, 10.1016/j.cor.2017.12.005.
Winer, R.S., A Reference Price Model of Brand Choice for Frequently Purchased Products. The Journal of Consumer Research, 13, 1986, 250, 10.1086/209064.
Wooldridge, J.M., Introductory econometrics: A modern approach. 2016, Nelson Education.
Yin, R., Aviv, Y., Pazgal, A., Tang, C.S., Optimal markdown pricing: Implications of inventory display formats in the presence of strategic customers. Management Science 55 (2009), 1391–1408, 10.1287/mnsc.1090.1029.
Similar publications
Sorry the service is unavailable at the moment. Please try again later.