Dynamic pricing mechanisms for the airline industry: a definitional framework

Abstract

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.