Capacity Pricing Under Uncertainty

Abstract

This paper shows the profit-maximising pricing strategy of a monopolist selling a fixed capacity before a certain time. The driving example is an airline filling a plane before departure time. The results show that the fear of rationing taking place at departure induces consumers with a high valuation to pay a premium at an earlier date. This premium varies with the number of potential consumers and the number of remaining seats. Another equilibrium is for the monopolist to simply set prices at a high level and leave with unused capacity. The authors also analyse the incentives for the monopolist to reduce capacity ex ante, in order to increase the likelihood of rationing equilibria to emerge.

JEL Classification: L12