Organizational Structure and Pricing: Evidence from a Large U.S. Airline★.

This article examines how organizational structure and heuristics shape pricing decisions in a large U.S. airline, challenging the common assumption that firms act as unitary, fully rational decision makers. Using comprehensive internal data, the study documents that pricing is delegated across distinct departments—network planning, pricing, and revenue management (RM)—each supplying inputs to a pricing heuristic called Expected Marginal Seat Revenue-b (EMSRb), which simplifies dynamic pricing by solving a sequence of static problems without accounting for product substitution or fully internalizing opportunity costs. The authors estimate a flexible demand model distinguishing leisure and business travelers and find that observed pricing biases, such as offering fares on the inelastic side of demand and persistently overforecasted demand, are consistent with revenue-maximizing behavior given the organizational decomposition and heuristic use. Counterfactual simulations reveal that unilateral corrections by individual departments do not increase revenues, while modeling the firm as a unitary decision maker solving a dynamic program leads to substantially different prices, higher revenues, and lower overall welfare, highlighting that ignoring organizational complexity and heuristics can bias welfare and market power assessments. The findings suggest that many industries with complex pricing problems likely face similar organizational and heuristic constraints, implying that empirical and policy analyses should account for these factors rather than assuming fully rational, centralized firm behavior.