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Perishable Good Dynamic Pricing Under Competition: An Empirical Study in the Airline Markets

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Abstract: Dynamic pricing is increasingly popular in the perishable good markets, but its effect under competition is uncertain due to the potential for the prisoner s dilemma. I study profit and welfare implications of dynamic pricing techniques in a competitive setting. I construct a structural dynamic oligopoly model where capacitated firms compete in selling differentiated products over a finite horizon when facing demand fluctuations. I estimate the model in U.S. oligopolistic airline markets using an event of carrier exit and flight-level data. I find that (i) the ability to smooth demand fluctuations intensifies competition and benefits consumers substantially; (ii) the ability to price discriminate softens competition and allows firms to extract a substantial amount of consumer surplus.

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