The impact of advance purchase deadlines on airline consumers’ search and purchase behaviors
Introduction
Classic theories of consumer search for perishable goods predict that prices should fall as a deadline approaches. For example, the value of bakery goods and newspapers decreases over time, i.e., these products are more valuable at the start of the business day than at the end of the business day. In contrast, products (or seats) in the airline industry are unique in that their value increases over time. Consequently, whereas the baker may cut prices as the business day comes to a close, consumer dynamics in the airline industry lead to the opposite effect. That is, prices tend to increase as the flight departure date approaches.
Airlines are able to induce this type of pricing behavior through the use of advanced purchase deadlines. By offering a discount fare that must be purchased by a certain deadline (i.e., a minimum number of days in advance of flight departure), airlines can induce price-sensitive consumers to make their purchases further in advance of flight departure. This leaves less price-sensitive consumers in the market, which allows airlines to charge higher prices for tickets closer to departure. In general, airlines typically sell multiple discounted products with different advance purchase deadlines. A study by Puller and Taylor (2012) found, for example, that discounted fare products represented 66% of their sample of U.S. bookings. Among these discounted fare products, 93.3% were associated with just four advance purchase deadlines: 21 days (3%), 14 days (47%), 7 days (32%), and 3 days (12%).
Even though advance purchase deadlines lead to systematic fare increases, their exact timing is uncertain. For example, the presence of the seven-day deadline does not necessarily mean that prices will increase on a flight for tickets purchased six (versus seven) days in advance of departure. This is because revenue management systems determine how many tickets of a particular product should be offered for sale. For flights in which it is expected that a large number of consumers will arrive in the last week prior to departure, the revenue management system will recommend selling a limited number of discounted tickets. From the consumer’s perspective, this means that the discounted product with a seven-day advance purchase deadline will sell out more than seven days in advance of departure. As this example shows, the presence of advance purchase deadlines combined with demand fluctuations induces price uncertainty in markets. Further, variation in prices can be particularly high in markets served by both low cost and legacy carriers due to misalignment in product offerings. This misalignment is caused by low cost carriers selling (only) one-way fares and legacy carriers offering a mix of one-way and round-trip fares.
In this paper, we examine how consumers respond to these advance purchase deadlines and associated price uncertainties induced by these deadlines using multiple datasets from an online travel agency (OTA), QL2 Software (a firm that many travel and retail firms use to collect and analyze competitors’ pricing information), a major U.S. airline, and the Airlines Reporting Corporation (a clearinghouse that processes all tickets purchased through travel agencies in the U.S., including OTAs). The OTA data provide information on the number of searches and purchases that occur in a market for specific search and departure dates. The QL2 Software data provide information on the fares available to consumers at the time they searched. Online search data from a major U.S. airline are used to validate results and a sample of tickets from the Airlines Reporting Corporation (ARC) is used to validate length of stay assumptions. To model the number of searches (and purchases), we use an instrumental variable (IV) approach to correct for price endogeneity and predict the number of searches (and purchases) in a market for specific search and departure dates. Our results provide insights into the impact of advance purchase deadlines on airline consumers’ search and purchase behaviors.
The remaining sections are organized as follows. Section 2 reviews relevant literature to motivate why airlines offer discounted products with associated advance purchase deadlines. Section 3 describes the data. Methodology and empirical results are presented in Sections 4 Methodology, 5 Results, respectively. Section 6 uses clickstream data from a major U.S. carrier’s website to validate the key findings of the study, namely that consumer search increases immediately prior to advance purchase deadlines and new consumers enter the market over time. Section 7 discusses implications for aviation practice and Section 8 concludes by summarizing the key findings and providing direction for future research.
Section snippets
Literature review
Several studies have developed theories to explain why airline prices increase as the departure time nears. The interest is motivated, in part, by the fact that the airline industry does not fit with traditional theories of search theory that predict prices fall in markets with the arrival of homogeneous consumers. McAfee and te Velde (2006) propose a theory to explain why prices rise in the airline and other markets that: (1) face uncertain and high demand; (2) have fixed capacity that can be
Data
To understand how individuals respond to advance purchase deadlines and price uncertainties induced by these deadlines, data are needed on individuals’ search and purchase behaviors. Using clickstream data, researchers have developed ways to identify individual consumers and track their online search and purchase behaviors across one or more websites (e.g., Bucklin and Sismerio, 2009).
In an ideal world, researchers would be able to use online clickstream data to identify all of the individual
Methodology
Consistent with the extant literature, we use a linear model to predict air travel demand (e.g., Bhadra, 2003, Granados et al., 2012, Mumbower et al., 2014). Specifically, we use linear regression methods to estimate the number of searches (or number of purchases) for market i with outbound departure date j that are made t days in advance of the outbound departure date. A key methodological challenge with this framework was finding a set of valid instruments to correct for price endogeneity.
Descriptive statistics for lowest fares
Fig. 2, Fig. 3, Fig. 4 and Table 5 present information about the lowest fares, number of searches and number of purchases by days from the outbound flight departure. Combined, these figures and table help visualize the price uncertainties faced by individuals.
Fig. 2 shows how the average minimum offered nonstop fare evolves throughout the booking period in business and leisure markets. The average minimum offered nonstop business market fare was always greater than its corresponding leisure
Validation
For validation of consumer search behavior, we use a sample of clickstream data representing consumers’ search behaviors for three leisure and seven business markets from a major U.S. carrier. The departure dates represented this data overlap with those in the OTA data and the markets are similar.15 In addition to validation,
Discussion
To the best of our knowledge, this is the first study that has empirically examined how advance purchase deadlines influence airline consumers’ search and purchase behaviors. Several interesting findings emerge from our study, two of which represent market conditions that are not accounted for in existing theories describing consumer search under deadlines for perishable goods with fixed capacity and pre-determined pricing schedules. First, price uncertainties are induced by advanced purchase
Conclusions and future research directions
In this study, we modeled airline travelers’ online search and purchase behaviors using an analysis database from an online travel agency and QL2 Software. We model individuals’ search and purchase behaviors using an instrumental variable approach that corrects for price endogeneity. Our study contributes to the literature by providing some of the first empirical insights into how individuals respond to advance purchase deadlines and price uncertainties induced by advance purchase deadlines.
Acknowledgment
This research was partially funded by a National Science Foundation Graduate Research Fellowship.
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