Are Consumers Strategic? Structural Estimation from the Air-Travel Industry

Many consumers have learned to delay purchases, anticipating that prices might decrease. Such strategic or forward-looking behavior has attracted increasing attention from various disciplines, including operations management, information systems, marketing, and economics. However, there is currently limited empirical evidence of the extent to which this strategic purchasing actually takes place. Combining two unique data sources from the air-travel industry (posted fare data and booking data), we use a structural model to estimate the fraction of strategic consumers in the population, assuming different levels of sophistication in consumers' perception of future prices: perfect foresight and weak- and strong-form rational expectations. We find that 5.2% to 19.2% of the population is strategic across markets, measured by the first and third quartiles. Our inter-market analysis indicates that shorter trips with more attractive outside options are populated with more strategic consumers. Using a non-parametric approach, we further find that most strategic consumers arrive either at the beginning of the booking horizon or close to departure. Finally, our counterfactual analysis shows that, contrary to conventional wisdom, the presence of strategic consumers does not necessarily hurt revenues. Rather, the impact varies by market. Commitment to a non-decreasing pricing strategy will likely benefit business markets but hurt leisure markets. Inter-market analysis shows that city-pairs with lower internet penetration, higher average price and shorter distances tend to benefit more from such commitment as well. 

About Serguei Netessine

Serguei Netessine is The Timken Chaired Professor of Global Technology and Innovation and the Research Director of INSEAD-Wharton alliance. He joined INSEAD in 2010 and previously he was a faculty member at the Wharton School, University of Pennsylvania which he joined in 2001. Prof. Netessine received BS/MS degrees in Computer Science and Electrical Engineering from Moscow Institute of Electronic Technology and, after working for Motorola and Lucent Technologies, he also received MS/Ph.D. degrees in Operations Management from the University of Rochester. His current research focuses on business model innovation, strategic aspects of supply chain management, incentives and contracting in supply chains and service delivery systems. His current industry projects include innovative business models through servicization of products as well as performance-based scheduling of the workforce. Professor Netessine has been the recipient of several teaching awards for delivering Supply Chain Management classes to MBA and Executive MBA students at the Wharton School and INSEAD and he frequently teaches in Executive Education Programs on supply chain/operations management and innovation. His research has been published in leading management journals, including Management Science, Operations Research, Marketing Science, Manufacturing & Service Operations Management and Harvard Business Review and it has also received extensive media coverage including articles in CIO Magazine, the Economist, Forbes, Multichannel Merchant, New York Times, US News and many others. Serguei holds Associate Editor and Senior Editor Positions at several leading academic journals including Management Science, Production and Operations Management, Operations Research and Manufacturing & Service Operations Management.