Dynamic pricing mechanisms for the airline industry: a definitional framework
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The phrase “dynamic pricing” has entered the airline revenue management lexicon in recent years with the emergence of new distribution capabilities that could allow airlines to adjust ticket prices more frequently. Yet each airline, vendor, and academic has a unique (and often incongruous) view of what dynamic pricing encompasses. To date, there has not been a definition of dynamic pricing proposed in the literature that clearly delineates how these mechanisms are different from traditional airline pricing and revenue management. In this paper, we propose a definitional framework for dynamic pricing for the airline industry. After providing a general definition of dynamic pricing, we describe three mechanisms for price selection—assortment optimization, dynamic price adjustment, and continuous pricing. Depending on the implementation and the information available to the airline at the time of pricing, each of these mechanisms could be used to adjust prices relatively infrequently or, at the limit, on a transaction-by-transaction basis. We close by linking recent technological developments in airline pricing, revenue management, and distribution to the three mechanisms introduced in the framework.
KeywordsDynamic pricing Airline revenue management Dynamic pricing engines New distribution capability Continuous pricing
A version of this framework first appeared in a PODS Research LLC discussion paper prepared for ATPCO (Belobaba et al. 2017). The authors wish to thank Tom Gregorson, Dan Zawack, Ellen Runyon, and Rolf Purzer for their valuable feedback and for their encouragement to publish the framework as a standalone article. The authors also thank Bill Brunger for his contributions to the discussion paper in which this framework first appeared.
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