When Airlines Play the Price Game:
How Dynamic Pricing Can Benefit Everyone – If There’s Enough Competition
The next time you search for a flight and watch the price jump $200 overnight, you might feel like the system is rigged against you. And you wouldn’t be alone. Few things irritate travellers quite like the volatility of airline fares, that nagging sense that some algorithm, somewhere, is squeezing every last dollar from your wallet.
But what if that algorithm is actually making things better – for you, for the airline, and for the market as a whole?
That’s the counterintuitive finding from research by Assistant Professor Chen Nan from NUS Computing’s Department of Information Systems and Analytics and his collaborator, Associate Professor Przemyslaw Jeziorski at the Haas School of Business at UC Berkeley. Their study examines the consequences of dynamic pricing in competitive airline markets, and the results challenge the conventional wisdom that sophisticated pricing strategies exist solely to extract more from consumers. In competitive markets, at least, dynamic pricing can be a rare win-win.
The problem with studying pricing in the wild
Airline pricing is famously opaque. The same seat on the same plane can cost $150 one week and $600 the next. Behind those shifts are complex algorithms that adjust fares in real time based on remaining capacity, how close the departure date is, and how demand is trending. Airlines were among the first industries to adopt this approach – a practice known in the trade as revenue management – and they’ve been refining it for decades.
Yet despite its ubiquity, surprisingly little was known about how dynamic pricing actually plays out when airlines compete head to head. Most prior research had focused on monopoly routes, where a single carrier controls all the seats. The conclusions from those studies were, frankly, dispiriting for consumers: dynamic pricing tended to boost airline profits at the expense of passenger welfare.
But monopoly markets are a special case. Chen and Jeziorski wanted to know what happens when you add competition to the mix.
A natural experiment at 30,000 feet
To answer that question, the researchers needed something rare: a clean, natural experiment where the competitive landscape shifted in a way that wasn’t tangled up with a dozen other confounding factors.
They found it on the Seattle–Tucson route.
From December 2015 to March 2016, both Alaska Airlines and Delta Air Lines operated daily nonstop flights on this corridor – a compact duopoly. But Delta’s service was seasonal. When Delta ceased operations at the end of March, the route flipped overnight from a two-player market to a monopoly. That sudden shift – from competition to no competition, with everything else held roughly constant – gave the researchers a clean case for isolating the effects of market structure on pricing behaviour.
To control for seasonal trends, they paired the Seattle–Tucson route with a stable duopoly on the San Diego–Boston corridor, where Alaska and JetBlue flew year-round. By comparing pricing and sales patterns across the two routes, before and after the exit, they could disentangle the effects of competition from broader market fluctuations.
The data itself was granular and carefully assembled. The team scraped daily prices and seat maps directly from airline websites over a 30-day window, tracking how fares and remaining capacity evolved for each individual flight as the departure date approached. In total, the dataset comprised more than 57,000 observations across 2,561 flights – a level of detail far richer than the aggregated, quarterly data typically used in airline research.
Two forces pulling in opposite directions
With this data in hand, Chen and Jeziorski built and estimated a dynamic oligopoly model. This was a mathematical framework that captures how competing airlines set prices over time, factoring in their own remaining seats, their competitors’ capacity, and the changing mix of passengers shopping for tickets.
The model allowed them to do something powerful: simulate what would happen under alternative pricing regimes. What if airlines couldn’t adjust prices at all and had to charge a single fare from the moment tickets went on sale until departure? What if they could vary prices over time but couldn’t react to how many seats they’d already sold?
By comparing these hypothetical scenarios with full dynamic pricing, the researchers were able to decompose the overall effect into two distinct mechanisms.
The first is price discrimination – the ability to charge different prices to different types of travellers based on when they book. Leisure travellers, who tend to be price-sensitive and book early, pay lower fares. Business travellers, who are less price-sensitive and often book at the last minute, pay more. This is the part of dynamic pricing that feels most like extraction – and the research confirms that, taken alone, price discrimination does shift surplus away from consumers and toward airlines. It softens competition by creating scarcity in the late market, where business travellers have fewer options and less bargaining power.
The second mechanism is revenue management – the ability to adjust prices based on how quickly seats are selling. If a flight is filling up fast, the fare rises to slow demand. If sales are sluggish, prices drop to stimulate bookings. This part of dynamic pricing, it turns out, works in consumers’ favour. It makes capacity utilisation more efficient, prevents early sellouts that would leave late-arriving travellers stranded, and – crucially –intensifies competition. When airlines can respond to real-time demand, they lose some of their ability to pre-commit to high prices, and that lost commitment power translates into lower fares.
The surprise: everyone comes out ahead
When you put both forces together in a competitive market, the net effect is striking. Under full dynamic pricing in the San Diego–Boston duopoly, consumer welfare increased by 3%, airline profits rose by 8%, and total welfare – the combined benefit to passengers and airlines – climbed by roughly 6%. Dynamic pricing, in this setting, is what economists call a Pareto improvement: everyone is better off, and no one is worse off.
Dig deeper and the distributional picture becomes even more interesting. Leisure travellers – the early bookers who are most sensitive to price – saw their welfare roughly double. Business travellers, despite facing higher fares in the late market, essentially broke even. They paid more per ticket, but they were also more likely to actually get a seat, because revenue management prevented the kind of premature sellouts that would have shut them out entirely.
The industry output effects were just as telling. Under dynamic pricing, the total number of seats sold increased by more than 15%. Airlines were filling more of their planes, and doing so more efficiently.
But remove competition, and the story flips
To test how market structure interacts with dynamic pricing, the researchers simulated a merger – collapsing the duopoly into a single carrier with the combined capacity of both airlines.
Under monopoly, dynamic pricing produced the opposite result. Consumer welfare fell by 14%. Total surplus dropped by nearly 5%. The monopolist captured all the gains from price discrimination and more, with no competitive pressure to pass any of that efficiency back to passengers.
Dynamic pricing is not inherently good or bad for consumers. Its effects depend fundamentally on the competitive environment. In a market with meaningful competition, dynamic pricing can improve efficiency by allocating scarce seats more effectively, while competition forces carriers to share some of those gains with passengers. In a monopoly, the same tools become instruments of extraction.
Why this matters beyond airlines
The implications reach well beyond the airline industry. Dynamic pricing has spread rapidly into hotels, ride-hailing, event ticketing, e-commerce, and even electricity markets. In each of these sectors, the same fundamental tension exists between the efficiency gains from responsive pricing and the risks of exploitation when competition is thin.
The research offers a clear signal for regulators and policymakers: the critical variable isn’t the pricing strategy itself, but the market structure in which it operates. Banning or restricting dynamic pricing in competitive markets could actually harm consumers by eliminating the efficiency benefits. But allowing it to flourish in concentrated markets – without adequate competition – risks tilting the balance decisively in favour of firms.
For the airline industry in particular, the findings have fresh relevance. A wave of consolidation over the past two decades has left many domestic routes in the United States served by just one or two carriers. If dynamic pricing benefits consumers primarily through the competitive channel, then the ongoing reduction in competition should give us pause. The same algorithms that improve welfare on contested routes may be doing exactly the opposite on monopoly corridors.
The bigger picture
At its core, this research is about something larger than airfares. It’s about how sophisticated, data-driven pricing strategies interact with the structure of markets – and whether the gains from technological sophistication are shared broadly or captured narrowly.
The answer, Chen and Jeziorski show, is not predetermined. It depends on choices we make about market design, competition policy, and regulatory oversight. Dynamic pricing is a powerful tool. Whether it serves the public interest depends entirely on the competitive conditions that surround it.
That’s a finding worth remembering the next time your flight fare changes overnight.
Read the full paper: Chen, Nan and Jeziorski, Przemyslaw, Consequences of Dynamic Pricing in Competitive Airline Markets (January 26, 2023) https://ssrn.com/abstract=4285718
