Fare Prediction Websites and Transaction Prices: Empirical Evidence from the Airline Industry

The marketing and operations disciplines have increasingly accounted for the presence of strategic consumer behavior. Theory suggests that such behavior exists when consumers are able to consider future distribution of prices, and that this behavior exposes firms to intertemporal competition that results with a downward pressure on prices. However, deriving future distribution of prices is not a trivial task. Online decision support tools that provide consumers with information about future distributions of prices can facilitate strategic consumer behavior. This paper studies whether the availability of such information affects transacted prices by conducting an empirical analysis in the context of the airline industry. Studying the effect at the route level, we find significant price reduction effects as such information becomes available for a route, both in fixed-effects and difference-in-differences estimation models. This effect is consistent across the different fare percentiles and amounts to a reduction of approximately 4%-6% in transactions' prices. Our results lend ample support to the notion that price prediction decision tools make a statistically significant economic impact. Presumably, consumers are able to exploit the information available online and exhibit strategic behavior.