Analyzing Multiple Pricing Decisions for Substitutes Under Stochastic Demand: an Experiment

Abstract

This study investigates how individuals choose prices for two substitutes under stochastic demand in an airline setting. We design two treatments: symmetrical and asymmetrical, meaning the demand distribution of the two flights having the same size of support or not. Several insights are obtained. First, the decision makers' price choices are closer to the theoretical benchmarks in the symmetrical setting. Next, the subjects do not want to overprice and fly with empty seats, exhibiting loss aversion with reference point. Finally, the subjects often treat the flights as independent rather than interrelated and price them separately, using an anchoring-and-adjusting heuristic.