Abstract
easyJet, one of Europe’s most successful low-cost short-haul airlines, has a simple pricing structure. For a given flight, all prices are quoted one-way, a single price prevails at any point, and, in general, prices are low early on and increase as the departure date approaches. We observe from these policies and from the empirical section of this paper that easyJet employs three distinct strategies: 1) it does not offer last-minute deals, 2) it offers a single class and lets price be the sole variable that controls demand, and 3) it varies the time at which tickets are first offered for sale (duration of sale). The first two policies are in stark contrast to traditional airline pricing strategies. Many airlines offer last-minute deals, either directly or via resellers. Second, the current prevailing practice is to control demand via seat allocation to various classes rather than by offering a single class and letting price be the sole variable that controls demand. The main objective of this research is to study the conditions under which offering a last-minute deal is optimal under the single-price policy. We also learn how the duration of ticket sales is affected by consumer characteristics. We find that, for an intermediate capacity level, uncertainty with respect to the arrival of the business segment will cause the firm to offer last-minute deals and thus partially price-discriminate within the tourist segment. The same is true for uncertainty with respect to the actual behavior of the firm: if consumers are uncertain whether the firm will offer last-minute deals, then, in equilibrium, both in a one-shot game and in a repeated game, the firm will, with some probability, offer such deals. In addition, we found that for an intermediate capacity level, the larger the number of segments (that differ in price sensitivity), the longer the duration of the period in which tickets are offered for sale.
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Notes
We also modeled the case in which each business consumer faces this uncertainty individually but only a numerical solution can be achieved. Assuming that there is no heterogeneity among business consumers regarding the uncertainty allows us to capture the main trade-off and keep the solution tractable.
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Acknowledgments
We are grateful to Stellios Haji-Ioannou, John Stephenson, and Ben Meyer at easyJet for making the data available for analysis and to Asim Ansari, Eyal Biyalogorsky, Fabio Caldieraro, Raghuram Iyengar, Don Lehmann, Olivier Toubia, Rajeev Tyagi, Garrett van Ryzin, Peter Rossi, and two anonymous reviewers for their thoughtful comments and suggestions. The authors would also like to thank Hernan Bruno for his excellent research assistance. easyJet® is a registered trademark.
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Koenigsberg, O., Muller, E. & Vilcassim, N.J. easyJet® pricing strategy: Should low-fare airlines offer last-minute deals?. Quant Mark Econ 6, 279–297 (2008). https://doi.org/10.1007/s11129-007-9036-2
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DOI: https://doi.org/10.1007/s11129-007-9036-2
Keywords
- Airline pricing
- Nonlinear pricing
- Revenue management
- Last minute deal
- Dynamic pricing
JEL Classification
- D4
- D9
- L11
- L12
- L13
- M3