Dynamic Pricing of Airline Tickets with Strategic and Myopic Passengers

Abstract

This paper studies the optimal clearance pricing of tickets in the presence of strategic and myopic passengers. We establish a two-perod dynamic pricing model, and characterize equilibrium prices and profits using equilibrium theory and backward induction method. We prove that a pure strategy equilibrium fails to exist. Instead, airlines play a mixed strategy with respect to their pricing. Finally, we use numerical examples to explore the effect of various parameters on the performance of optimal strategy.