Airlines, Competition and Pricing

Air transportation has always been a domain of interesting and complex problems in terms of operation management. It involves numerous uncertainties from planning to implementation, while requiring long resource planing and scheduling horizon.

While you can buy a ticket conveniently with couple clicks, there is an incredible e-commerce infrastructure with parallel processing capability (simultaneous ticketing for a spot from numerous agencies), fleet management (harmonization of airplanes for the highest efficiency) and numerous other logistics solutions such as crew management and airport/gate/check-in planning in the back-end. Further uncertainty is induced by the break down/maintenance and unexpected delays.

The situation is similar for the capacity planning and pricing of such a complex system. The flexible ticketing options emerged by the demands of the customers induce further uncertainties. In the world of production and service systems, uncertainties have a significant consequence: MORE COST. More costs reflect as higher prices to the consumers. Simply put, the extra capacity needed because of the uncertainties is compensated by the customer – in the lack of competition-.

In this case, competition is an important catalyst for the airlines to develop new ways to cope with  and compensate the uncertainties as the profit margins are shrinking (such as overbooking). An article in New York Times illustrates how extra we are actually paying and how significant the impact of competition is.


Hidden city ticketing

If the figure is analyzed, tickets to hub-cities dominated by a carrier, where the competition is weak, are extremely expensive. In fact so expensive, that if a connecting flight is added to a destination city with a more competitive market, the prices go down. For example Fargo – Chicago flight costs $528, whereas Fargo – Chicago – New York flight costs $213. Unbelievable isn’t it?

In conclusion, if you buy a ticket for Fargo – Chicago – New York and don’t take the connection flight, you can get the half price for Fargo – Chicago ticket. This situation is not apparent in Turkish Airlines domestic pricing, but for international flights, where the market is much more competitive, this is a viable strategy to consider. At the same time this type of inconsistencies, which seem irrational for the customer obviously affect the trust and loyalty of the customer.

— this post has been published in dijitolog

Amazon and Algorithmic Pricing

Recently an interesting incidence happened in E-Commerce giant Amazon.

As reported by Michael Eisen, 17 copies of the biology book “The Making of a Fly” by Peter Lawrence published in 1992 (not printed anymore) was for sale on Amazon. 15 second hand copies started from $35.54, whereas 2 new copies were sold starting from exactly 1730045.91$.

More interestingly, the two sellers of the new copies have both profiles with high customer satisfaction feedback and high transaction volumes and they both ask for more than million $s . This abnormal situation lead to a much more interesting discovery. Eisen followed the behavior of the prices, both rising steadily and discovered a very simple relationship between the two sellers prices.

Profnath, strategically was positioning itself “slightly” below the market price to be price competitive and draw more customers to its e-store, so it was setting its price exactly 0.9983 times the lowest market price. Bordeebook, on the other hand, was relying on its high sales volume and excellent customer feedback to increase its profit margin, thus setting the price to exactly 1.270589 times the lowest price. As there are no other new copies of the book, these sellers run into an infinite loop, where they rise the prices to the roof (million $ level). Furthermore, this kind of responsive behavior raises the concerns, that Bordeebook maybe does not even posses the actual copy of the book and acts as a reseller.

Today, while firms essentially consider the production and market data for pricing, it is not possible to overlook the competitors data and strategy. Especially, e-commerce enables possible ways of automation and leads to new, emerging situations. The main reason for these kind situations is that it is impossible to manually maintain such a diverse inventory of enormous volume. Therefore, as in the case of Amazon doing business with countless suppliers, for the sustainability of the system automation is inevitable. Thus, interesting price tags with .01$ precision are mostly outputs of smartly prepared scripts. In this regards, process control is obviously necessary, as I doubt someone would be interested in a regular book sold for million $s.

– this post has been published in dijitolog