Claudio Piga (University of Genova) (webinar)

“Linking Algorithms to Static and Dynamic pricing: theory and evidence”

Abstract: We study the main features of a pricing algorithm in the presence of organizational frictions, which impede continuous  price adjustments. If prices cannot be continuously and instantaneously updated, and advance sale of fixed capacity is possible, the pricing algorithm optimally assigns a price to each unit in a (non-strictly) monotonically increasing sequence based on the order of sale; prices remain “static”  until the algorithm induces dynamic pricing by modifying the sequence. Data from a large European carrier support the assumption that airlines do not adjust fares constantly, as static spells last 35 hours on average but may be longer depending on a flight’s load factor, its selling rate and the time to departure. Dynamic pricing may occur in two forms, with seats being either marked-down or marked-up. The latter tends to occur predominantly during the day, suggesting that human decision-making often complements the algorithm’s operativity.

Joint with Marco Alderighi (Universitá della Valle D’Aosta) and Alberto Gaggero (Universitá di Pavia).