Many believe in travel hacks like booking on Tuesdays or using incognito mode to snag cheaper airline tickets. But is there truth to these claims? According to a new study co-authored by Olivia Natan, an assistant professor of marketing at the Haas School of Business, the reality of airline pricing is far more complex and often contradicts common assumptions.
Woman using a laptop and phone to search for plane tickets, illustrating the common online travel booking experience.
Natan, along with colleagues from the University of Chicago, Yale, and the University of Texas at Austin, delved into the inner workings of a major U.S. airline’s pricing strategies. Their findings revealed a system that deviates significantly from traditional economic models and consumer expectations. So, let’s dive into the real factors that influence How Much Are Airline Tickets and debunk some common myths.
The Illusion of Choice and Price Sensitivity
In typical retail settings, like buying fruit jam, consumers can easily substitute one product for another based on price. If strawberry jam is too expensive, shoppers might opt for raspberry. This substitution effect is a fundamental principle of economics.
When searching for airline tickets, travelers are presented with various flight options from the same airline. They weigh factors like price and convenience, potentially choosing a slightly less convenient but cheaper flight.
However, Natan’s research indicates that airlines don’t fully account for this substitution behavior in their pricing models. They often price seats on individual flights separately, even though changing the price on one flight inevitably impacts demand for others. This independent pricing strategy can be a key factor in determining how much are airline tickets on a particular route.
The Limited Pricing Menu and Competitive Neglect
One of the most surprising revelations is that airlines don’t directly incorporate competitor prices into their automated price-setting systems. In a competitive market, one would expect airlines to match price cuts from rivals. The lack of this direct competition further influences how much are airline tickets across different airlines.
Instead, airlines rely on a pricing heuristic called Expected Marginal Seat Revenue-b (EMSRb). This shortcut allows them to quickly set prices for numerous flights daily and reserve seats for higher fares. The speed and efficiency of EMSRb are critical in the fast-paced airline industry, but it can also lead to pricing inefficiencies.
The EMSRb method leads to another unexpected outcome: airlines operate with a limited set of pre-determined prices for each flight. Unlike other industries that can fine-tune pricing to the cent, airlines work with significant price gaps, sometimes exceeding $100. They might sell the first block of tickets at the lowest price, followed by another block at the next price point, and so on. This block pricing method has a direct effect on how much are airline tickets cost at any given time.
The standardization of prices across different sales channels, like travel agents and online platforms, further reinforces this pricing structure. This system, while ensuring price consistency, limits the airline’s ability to respond to real-time changes in opportunity costs.
The Disconnect Between Departments and Demand Forecasting
The research also uncovered a lack of coordination between different departments within the airline. Economically, companies should always raise prices if it increases revenue. However, the study found that pricing teams often include options that are too low, even by their own internal estimates.
The revenue management team partially corrects this underpricing by inflating demand forecasts, which reduces the number of underpriced tickets available to consumers by about 60%.
Natan attributes these pricing discrepancies to a lack of coordination between teams choosing the best pricing inputs. This disconnect can lead to lower revenue, as selling fewer tickets at higher prices might be more profitable. Alternatively, airlines may prioritize customer loyalty or avoid regulatory scrutiny, which impacts how much are airline tickets.
The Future of Airline Pricing and What it Means for You
Natan suggests that airlines may adopt more dynamic pricing platforms in the future. These platforms could assign numerous different prices to a single flight, making pricing more variable.
So, what does this all mean for travelers looking to save money on flights? While the search for a secret trick to find lower fares may be futile, there are still strategies that can help. What I can say is that prices do go up significantly 21, 14, and seven days before a flight. Just buy your ticket before then.
Ultimately, understanding the complexities of airline pricing can empower you to make more informed decisions and potentially save money on your next flight.
References
- Organizational Structure and Pricing: Evidence from a Large U.S. Airline By Ali Hortaçsu, Olivia Natan, Hayden Parsley, Timothy Schwieg, and Kevin Williams The Quarterly Journal of Economics, Sept. 27, 2023
