10 ravulapati price
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Modeling Price Elasticity
Kiran Ravulapati, Katia Frank, Wassim Chaar
Delta Technology, Atlanta, GA 303!
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What is Price Elasticity ?
#rice $lasticity %#$&
A #$ o' ()* means there is a )*+ rop in
eman 'or a )+ increase in price*
#$+ change in ,eman,
+ change in 'are
=
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Price Elasticity - Literature
#ast research moele price elasticity at a macro
level using aggregate, high level ata*
( -um, Tae .*, /hang, Anmin an /hang, imin %)113& 2nter(Firm Rivalry an Firm(
4peci'ic #rice elasticities in Deregulate Airline 5arkets,6 7ournal o' Transport
$conomics an #olicy,"8, )8)()1"
#rice elasticity at prouct level receive little
attention* #erhaps, this is 9ecause o' the revenue
management e''ects involve*
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Price Elasticity - Assumptions
We moele simple price elasticity only*
nteraction 9et:een proucts is not consiere*
We stuie the ;vacuum< scenario i*e*, all airlines
in the market have same prices*Revenue management e''ects are consistent*
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Price Elasticity - “Vacuum”
4tep )= Divie historical eman>price ata into 'are
9ans* Bookings for market XXX-YYY
Discounted Coach
0 - 1 0
3 0 - 4 0
6 0 - 7 0
9 0 - 1 0 0
1 2 0 - 1 3 0
1 5 0 - 1 6 0
1 8 0 - 1 9 0
2 1 0 - 2 2 0
2 4 0 - 2 5 0
2 7 0 - 2 8 0
3 0 0 - 3 1 0
3 3 0 - 3 4 0
3 6 0 - 3 7 0
3 9 0 - 4 0 0
4 2 0 - 4 3 0
fareband
d e m a n d
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Price Elasticity - “Vacuum”
4tep "= Remove R5 e''ect 9y cumulating eman*
Bookings for market XXX-YYY
Discounted Coach
0 - 1 0
3 0 - 4 0
6 0 - 7 0
9 0 - 1 0 0
1 2 0 - 1 3 0
1 5 0 - 1 6 0
1 8 0 - 1 9 0
2 1 0 - 2 2 0
2 4 0 - 2 5 0
2 7 0 - 2 8 0
3 0 0 - 3 1 0
3 3 0 - 3 4 0
3 6 0 - 3 7 0
3 9 0 - 4 0 0
4 2 0 - 4 3 0
fareband
C u m u l a t i v e D e m a n d
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Price Elasticity - “Vacuum”
4tep 3= A@ust the curve 'or sell up*
Bookings for market XXX-YYY
Discounted Coach
0 - 1 0
3 0 - 4 0
6 0 - 7 0
9 0 - 1 0 0
1 2 0 - 1 3 0
1 5 0 - 1 6 0
1 8 0 - 1 9 0
2 1 0 - 2 2 0
2 4 0 - 2 5 0
2 7 0 - 2 8 0
3 0 0 - 3 1 0
3 3 0 - 3 4 0
3 6 0 - 3 7 0
3 9 0 - 4 0 0
4 2 0 - 4 3 0
fareband
C u m u l a t i v e D e m a n d
Adjusted Cumulative Demand
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Price Elasticity - “Vacuum”
4tep != Fit a 'unction to the a@uste eman curve
using regression analysis an calculate price
elasticity* Price Vs Demand Curve for market XXX-YYY
Discounted Coach
0 - 1 0
3 0 - 4 0
6 0 - 7 0
9 0 - 1 0 0
1 2 0 - 1 3 0
1 5 0 - 1 6 0
1 8 0 - 1 9 0
2 1 0 - 2 2 0
2 4 0 - 2 5 0
2 7 0 - 2 8 0
3 0 0 - 3 1 0
3 3 0 - 3 4 0
3 6 0 - 3 7 0
3 9 0 - 4 0 0
4 2 0 - 4 3 0
fareband
D e m a n d
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Price Elasticity - esults
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Price Elasticity - esults
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Price Elasticity - Summary
This moel is a 'irst step to:ars eveloping a
methoology 'or price elasticity*
4elect a representative sample o' historical ata*
Group only similar markets>proucts 'or thisanalysis*
To capture seasonal changes in prices, this
analysis shoul 9e repeate 'or each season using
ne: ata*
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Price Elasticity - Summary
Revenue management e''ects, spill an capacity
limits, shoul 9e use to etermine the impact o'
'are increase>ecrease*
5ethoology can 9e use at various aggregatelevels ( market>region>airline>proucts*
#ossi9le etensions
( mpact o' 'are rules
( nteraction 9et:een su9stituta9le proucts
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!uestions " #omments