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Prof. Soheil Ghili
Assistant Professor of Marketing
Yale School of Management
Yale University

ABSTRACT

This paper analyzes sequential screening, a selling mechanism in which a firm price-discriminates across buyers based on how their uncertainty about their willingnesses to pay (WTP) evolve over time. We design an economical-yet-informative experiment, which was run on the pricing of flight ancillaries in collaboration with a Low-Cost Carrier (LCC) internatinal airline in India. Leveraging the experiment results, we estimate a random-effects demand model with heterogeneous uncertainty resolution. We use the model to simulate the optimal pricing policy and find that the airline should optimally commit to a 10% early-purchase discount on seat selection. More broadly, we find that early-purchase discounts (i.e., sequential screening) is optimal when customers with lower ex-ante WTP face larger uncertainty about their ex-post WTP. Further counterfactual analysis examines the impact of marginal costs, the role of commitment in the design of the pricing scheme, and a more general menu of “prices and refunds.” Our framework (i.e., experiment design and demand model) may be used to study optimal pricing and welfare for any other product that has a set consumption date and requires booking, such as flights, accommodation, and events.