Research / BFI Working PaperNov 23, 2021

Organizational Structure and Pricing: Evidence from a Large U.S. Airline

Ali Hortaçsu, Olivia R. Natan, Hayden Parsley, Timothy Schwieg, Kevin R. Williams

We study how organizational boundaries affect pricing decisions using comprehensive data from a large U.S. airline. We document that the firm’s advanced pricing algorithm, utilizing inputs from different organizational teams, is subject to multiple biases. To quantify the impacts of these biases, we estimate a structural demand model using sales and search data. We recover the demand curves the firm believes it faces using forecasting data. In counterfactuals, we show that correcting biases introduced by organizational teams individually have little impact on market outcomes, but coordinating organizational outcomes leads to higher prices/revenues and increased dead-weight loss in the markets studied.

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