AEM 4160: Strategic Pricing Prof.: Jura Liaukonyte Lecture 9 Advanced Booking and Pricing with capacity constraints. Lecture Plan. HW 3 Reading for next class: HBS Case “ Gardasil ” INSTEAD of Tuesday, March 5 th class: Experiment in a Lab Tacit Collusion and Price Matching
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Price matching guarantee is simply a mechanism for tacit collusion or competition reduction between firms.
Any offer of the price matching guarantee means effectively taking away any gains that its competitor might get from cutting price.
If a firm offers a price matching guarantee, then a search consumer will buy from it because the consumer knows that in the event that there is a lower price offered in the market the consumer is insured that it will match that price.
Since price matching takes away the gain from price cutting, no firm cuts price and price competition is reduced.
fill 72.4% of seats while the
break-even load is 70.4%.
American: DFW-LAX All Tickets Sold in 2004Q4http://leedr.sona-systems.com/exp_info.aspx?experiment_id=133
Requires an inverse relationship between consumer price sensitivity and customer arrival time.
Less price sensitive customers are unwilling to purchase in the advance period so that advance purchases are made to only low-valuation customers
Similar to traditional models of second-degree price discrimination.
Partial refunds are used to control for the selection of potential customers who make reservations but differ with respect to their cancellation probabilities.
Q seats protected for
high fare passengers
Sell no more than the low
fare booking limit, 118 - Q
As more units are ordered,
Expected marginal benefit
Expected gain or loss .
Expected marginal loss
of overstockingGraphical Analysis
( X ) is Normal distribution with mean 9 and Standard Deviation 3.
Moreover, prices as well as all package components can continuously change over time as the service provider learns demand and available capacity changes (e.g., due to cancellations).
The service provider can now instantaneously adjust to changing conditions.
Overbooking becomes more calculated and more common
With these new technologies, sellers can run advance-selling experiments
By limiting quantities sold, learn more about buyer reactions and current demand conditions.