How Airline Ticket Pricing Really Works, Study Finds

Author: University of California - Berkeley Haas
Published: 21 Oct 2023 - Updated: 4 Nov 2026
Publication Details: Peer-Reviewed | Research Study Analysis

Table of Contents:
Synopsis - Definition - Overview - FAQs - Insights, Updates - Related Content

Synopsis

This research, a peer reviewed study in The Quarterly Journal of Economics coauthored by Olivia Natan of the Berkeley Haas School of Business with researchers from the University of Chicago, Yale and the University of Texas at Austin, examined the pricing systems of a major U.S. airline. It found that airlines set prices for each flight separately without accounting for travelers switching between flights, do not directly build competitors' prices into automated pricing, and sell seats from a small, fixed menu of fares with large gaps between them. It also found coordination gaps between pricing and revenue teams. The findings help travelers, including seniors and people with disabilities who often need to plan flights carefully, understand why many fare hacks do not work.*

At a Glance

• 1 - Gaps between possible fares on a flight can exceed $100.
• 2 - Airlines are testing continuous pricing, which could give every seat its own price.
• 3 - The pricing shortcut most airlines use is called Expected Marginal Seat Revenue-b, or EMSRb.
• 4 - Inflated demand forecasts cut the number of underpriced tickets shown to buyers by about 60 percent.

Topic Definition

Airline Revenue Management

Airline revenue management is the set of methods airlines use to decide how many seats to sell at each fare level on a flight, aiming to earn the most revenue from limited, perishable inventory. It relies on demand forecasts and rules for holding back seats for later, higher-paying travelers, and it determines when cheaper fares close and more expensive ones open as departure approaches.

Overview

This article has been updated from the original version published October 12, 2023.

A new paper coauthored by Olivia Natan of Berkeley Haas and published in The Quarterly Journal of Economics peers into the black box of airline pricing and finds some surprises.

Buy your ticket on a Tuesday. Search in your browser's incognito mode. Use a VPN to pretend you live in Suriname.

"There are so many hacks out there for finding cheaper airline tickets," says Olivia Natan, an assistant professor of marketing at the Haas School of Business. "But our data shows many of these beliefs are wrong."

With four colleagues - Ali Hortaçsu and Timothy Schwieg from the University of Chicago, Kevin Williams from Yale, and Hayden Parsley from the University of Texas at Austin - Natan looked deeply into the structure and processes behind how prices are set at a major U.S. airline. The system that she found, which is representative of airlines around the world, was strikingly at odds with what many economists would expect - and most consumers assume.

"We initially didn't know how to rationalize the things we were seeing," she says.

Substituting Convenience for Price

Consider fruit jam at the grocery store. Consumers have many options. If a company raises the price on its strawberry jam, one might fairly assume that this would affect sales of both strawberry and neighboring raspberry jam, since consumers can substitute one for another.

The same can happen with plane tickets: When people visit a website such as Google Flights or Kayak and search for a ticket, a wide range of different flights from the same airline appear. Travelers tend to make selections that balance convenience and price: The price of one flight might push people to select a slightly less convenient but cheaper flight.

"But the systems airlines use don't consider this kind of substitution," Natan says. They set the prices of seats on each individual flight on a given route separately, "even though changing the price on one flight will affect the way people think about all their options."

A Small Menu of Pre-set Prices

Perhaps most surprisingly, airlines also don't directly incorporate the prices of their competitors in their automated price-setting. Typically, if one airline cut its prices, one would expect other firms to do the same. If they don't, this dampens the benefits of a competitive market.

Setting prices of each product separately without considering substitution, Natan explains, is the result of a specific pricing heuristic - or decision-making shortcut - that airlines use called Expected Marginal Seat Revenue-b, or EMSRb. This shortcut is widely used because it is fast enough to set prices for hundreds of thousands of flights daily, and it allows airlines to reserve some seats to sell at higher prices.

The use of EMSRb, the researchers show, results in another outcome that consumers may not expect. Despite how it may appear when looking for flights, airlines have a fixed and relatively small number of prices that they assign to tickets on each flight. Unlike other consumer sectors, where pricing can be adjusted and targeted down to the penny, airlines operate with large gaps between each possible price - sometimes upwards of $100. They may sell the first 30 economy tickets at the lowest price, and then the next 30 tickets at the next possible price, and so on.

"Airline tickets are sold through global distribution systems that make sure a travel agent in Wichita or Miami sees the same price as you do on your computer at home," Natan says.

This system emerged from an industry alliance to facilitate inventory management across many channels. Other businesses in the travel sector, such as hotel rooms, cruises, trains, and car rentals do the same.

The downside is that airline ticket prices are relatively unresponsive to real-time changes in opportunity costs, as the next discrete fare is often a significant jump up. The researchers found that even if the airline would like to increase the price by $100 - half the price of an average one-way ticket - they only do so about 20% of the time, since no fare is available at that price.

Today, airlines are starting to experiment with what's known as "continuous revenue management," which would, for instance, assign 100 different prices to a flight with 100 seats.

"That would make pricing significantly more variable," Natan says, "but even that would not be the kind of targeting that many consumers assume airlines use."

Lack of Coordination Across Departments

One of the strangest discoveries from the research relates to the process airlines use to set their prices. To an economist, Natan explained, there is never a reason that firms would not raise prices if the increase assures an increase in revenue. But the set of possible prices chosen by the pricing team nearly always includes an option which is too low, even by their internal estimates.

The pricing team's work is made difficult by having to choose an entire menu of discrete prices.

"We found they could make more money today by selling fewer tickets at higher prices and not foreclose future opportunities. In practice, they choose the menu of prices without using their internal demand predictions," Natan says.

Interestingly, the revenue management team corrects much of this underpricing before it ever reaches consumers. After prices are filed and before tickets go on sale, this team makes demand forecasts that determine final prices. These forecasts are routinely inflated, reducing the number of underpriced tickets shown to consumers by roughly 60%.

"We find that these prices are a consequence of teams from different departments choosing the best pricing inputs when they are unable to coordinate," Natan says. "This may result in lower revenue, but in practice our solution could not be implemented."

Two other possibilities as to why airlines don't only focus on short-term revenue, she speculated, are either to build customer loyalty or to avoid regulatory scrutiny.

Over the next several years, Natan says, airlines may start to adopt more dynamic pricing platforms, and non-business travelers may benefit from these changes. But for now, the hunt for an undiscovered trick to find lower fares is largely futile. What is clear is that it's wise not to wait until the last minute.

"What I can say is that prices do go up significantly 21, 14, and seven days before a flight," Natan says. "Just buy your ticket before then."

By Ali Hortaçsu, Olivia Natan, Hayden Parsley, Timothy Schwieg, and Kevin Williams - The Quarterly Journal of Economics, Sept. 27, 2023.

Frequently Asked Questions

NOTE: Researched FAQs by Disabled World (DW)

When is the best time to buy airline tickets?

This study found that prices often rise 21, 14 and 7 days before a flight, so buying earlier than three weeks out usually avoids those jumps.

Does searching in incognito mode lower airfares?

The researchers found little evidence that common tricks like private browsing change the fares offered, since prices come from a fixed set of fares.

How do I request wheelchair assistance on a flight?

Request it when booking or contact the airline at least 48 hours before travel. U.S. airlines must provide assistance under the Air Carrier Access Act.

What is a global distribution system?

It is a network that shares airline seat availability and fares with travel agents and booking websites so everyone sees the same prices.

Why do fares jump suddenly?

Airlines sell seats in fare buckets. When the cheaper bucket sells out or closes, the price moves to the next fixed level, which can be much higher.

Can travelers with disabilities get fare discounts?

U.S. airlines do not generally offer disability fare discounts, but they cannot charge for required assistance, and some other countries offer reduced fares for companions.

What is dynamic pricing?

Dynamic pricing changes prices often based on demand and other factors. Airlines are moving toward more continuous forms of it, but most still use fixed fare levels.

Do airlines match competitors prices automatically?

According to this study, the airline examined did not directly include competitor prices in its automated pricing, though pricing staff may watch rivals.

Insights, Analysis, and Developments

Editorial Note: Popular tips such as booking on a Tuesday or searching in a private browser window rest on the idea that airlines constantly target individual shoppers, but this study suggests the reality is more rigid and less personal. The most reliable advice is simple: book before the price jumps that often come three weeks, two weeks and one week before departure. That matters for travelers with disabilities, who may also need time to request wheelchair assistance, seating near an aisle or travel with a service animal, all of which work best when arranged well ahead of the flight.*

Attribution/Source(s): This peer-reviewed publication was selected for publishing by the editors of Disabled World (DW) due to its relevance to the disability community. Originally issued as a press release by University of California - Berkeley Haas and published on 21 Oct 2023. Last updated on 4 Nov 2026. This content may have been edited for style, clarity, or brevity.

* Editorial additions by Ian C. Langtree.