Essays on Dynamic Games and Airline Fare Structure

Abstract

This dissertation is a collection of essays on dynamic games and airline fare structure. Chapter 1 analyzes a two-party, two-district dynamic game of political campaigning. Public information in each district is modeled as a Brownian motion with unknown drift. Two diametrically-opposed parties campaign in order to influence public opin- ion. In equilibrium, the trailing party always campaign in the more favorable district, adopting a “preaching to the choir” strategy. This paper is an immediate two-district extension of Gul and Pesendorfer (2012). The additional dimension yields two new results: (1) parties are willing to campaign in a district where it already has an advantage and (2) parties benefit from an increase in campaign cost.

Chapter 2 models a game of patience among restaurant customers. Customers and restaurants have circular spatial types. Customers are randomly matched to restaurants and make accept/reject decisions facing a deadline. Customers sometimes reject in hopes of matching with a more ideal restaurant in the future. When supply is limited, equilibrium makes customers completely impatient in the second half of the game. If a cartel introduces a uniform price to every customer, it will charge a very high price to induce high-quality matches. The cartel yields a striking result: Consumer welfare decreases when exogenous matching rate improves.

Chapter 3 solves an airline fare optimization problem. Airlines segment customers primarily via time of arrival to market. In each segment, airlines can further price discriminate customers with a limited number of price points to better capture the area under the demand curve. I solve the problem of joint optimal pricing under a capacity constraint. The optimal fare structure sees prices clustering towards the bottom of the demand curve in any given segment. Common functional forms of demand yields convenient rules-of-thumb for the pricing manager. This work fills in a gap in academia and in industry where there is little linkage between filed fares and demand.