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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

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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