Uncertainty in Dynamic Pricing Environments

We develop a model of consumer choice with dynamic prices, preference uncertainty, and purchase delay. Simulating the model, we find that preference uncertainty can rationalize delay, but expected price increases discourage waiting. Using novel data from the Survey of International Air Travelers that include information on trip and passenger characteristics, fares, and the timing of arrivals and purchases, we document delay patterns and price heterogeneity in the airline industry. We then perform a series of empirical tests to study selection into an arrival date, the propensity to delay, and the consequences of delay. Although trip and passenger characteristics drive the arrival behavior, the evolution of prices plays a role in the choice to delay. Consistent with our model, consumers in flight segments with relatively steep price paths are less likely to delay. Finally, controlling for trip and passenger characteristics and the purchase period, passengers who delay pay slightly more on average, though this effect disappears if we consider longer delay periods. This may suggest that consumers are willing to delay and pay more in order to reduce their uncertainty, but that they are unwilling to delay long periods of time if prices continuously increase.