A Model of Airline Pricing- Capacity Constraints and Deadlines

Abstract

We study monopolistic pricing, with a capacity constraint, of a good that loses its value after three periods. In each period a continuum of buyers, each of whom might be one of two types, enter. Each of the buyers chooses either to make a purchase as soon as they enter, or to wait for a lower price. The price path is found to be strictly non-decreasing, u-shaped or horizontal for different proportions of buyers with a higher willingness to pay. Any strategy involving 'final sales' is non-optimal. The predictions are empirically tested.