Why do firms dynamically modify their price? There several reasons, but the main goal of dynamic pricing is to allow for better allocation of products to customers according to their preferences while exploiting such differences to improve the overall profitability of the firm. (Prices may also reflect changes in the willingness to pay of customers or changes in the costs of providing the service).
The Wall Street Journal recently had an article (“Whatever You Do, Don’t Buy an Airline Ticket On … “) that made the case that one should not buy airline tickets over the weekend since these are consistently higher than the prices during the middle of the week, which, in my opinion, makes very little sense. Don’t get me wrong: it’s not that I am saying that it does not happen. I am merely saying that it makes very little sense to alter the prices so frequently, in a manner that seems to add very little value to the airlines. What kind of temporal differences does the airline exploit here?
The two main reasons that the article cites are:
When airlines want to push through a fare increase, marking up their basic prices across the board usually by $5 or $10, they often do that on Thursday night, then watch to see if competitors match and if the higher rates stick over the weekend. If competitors balk, prices can be rolled back by Monday morning.
In addition, airlines don’t manage their inventory as actively on weekends, so if cheap seats sell on some flights, prices automatically jump higher. Fare analysts may decide later to offer more seats at cheaper prices, but not until they come back to work on Monday, according to airline pricing executives.
But more than anything, it seems that this cycle is still a remnant from the times most of the sales were done through travel agencies, and airlines wanted sales out early in the week to generate buzz while customers could buy from travel agencies. At that time, sales launched on Friday may not get noticed. Is it possible that with all the sophisticated data analysis methods, airlines are still bound by these traditions?
Another thing that somewhat surprises me is the weekend effect. We live in a world in which people purchase tickets and communicate 24/7. Yet, airlines have to wait until after the weekend for managers to come and override the system’s recommendations. If this had to be done once or twice, I would understand. But it seems that this has to be done at the beginning of many weeks. Can’t someone fix it? Can’t one predict the impact of price changes? Maybe I shouldn’t be so surprised, as this may be another explanation why airlines do so poorly financially.