Comment by em500 | Hacker News Reader

Comment by em500 | Hacker News Reader

Parent Full thread

Some notes for the non-economically schooled readers:

- Ungated (working paper) versions are here[1] and here[2]

- This was published in Econometrica, one of the top journals in economics. That doesn't mean that the results are true, but it means that the the math and methodology are probably sound. If you want to attack the results, the weaknesses are probably in the (implicit) model assumptions.

- In economic lingo, "welfare" means consumer surplus (buyer gets a good deal) + producer surplus (seller makes a profit). Standard academic economics analysis is indifferent wether the producer or consumer gets the profits (i.e. between producers selling at costs and consumers buying cheaper that they'd be willing to pay, and producers maximizing profit while consumers maximum they're willing to pay). "Higher welfare" in dynamic pricing vs uniform pricing means that the sum is higher in dynamic pricing. In this context it basically means that more flights are flown using dynamic pricing than would have been in uniform pricing. Negative externalities from more flights are usually out of scope for a paper like this.

- Airlines can adjust prices continuously for the same flight as a response to demand changes, or price discrimination (charge more to those willing to pay more, i.e. business travelers). The paper claims as a key contribution the disentanglement of these motives. I haven't gone through it to see if it's sound, but when since it's published in Econometrica, it will probably take quite some time to fully digest.

[1] https://www.nber.org/system/files/working_papers/w28989/w289...

[2] https://cowles.yale.edu/sites/default/files/files/pub/d21/d2...

Note that journal is Econometrica, not Econometrics, and is widely considered the top journal for quantitative work in economics. (slight nitpick in case OP statement causes confusion).

This is the kind of paper that goes a far way to establish tenure. Good job to the author if that is their stage in their career.

Noted and corrected, thanks.

Isn't the conclusion trivial? With perfect price discrimination, every buyer exposes their exact utility gain from buying the product, that's the price they'll pay for it. Of course the resource will be allocated optimally.

Naturally in this situation only the seller will benefit from the transaction. Everyone else is +-0. Utility/"welfare" is maximized but consumers get none of it.

And of course, in the end even talking about utility assumes the price someone is willing to pay reflects their utility gain. This is the most fundamental assumption in economics, but it's pretty clear that in the real world this is not the case. Especially for luxury goods such as air travel.

It's nontrivial because the price discrimination isn't perfect, and the paper looks at a number of secondary considerations (most notably the assumption that pricing dynamicalkly purely based on how far in advance bookings are made captures the difference between a class of business travellers who prefer a situation in which they have to pay even higher prices to ensure seats are available with a day or two's notice, and leisure travellers whose flexibility around travel dates means they care more about price than availability of the lowest price tickets)

I do agree that it's unremarkable that price discrimination results in higher total welfare than uniform prices though, and all the other conclusions are completely in line with expectations. Its also the case that the airline's own price discrimination models will be more sophisticated with access to better (commercially sensitive) data than this stylised version

I think you might find lots of economics results to be “trivial”, because the results do not contain the value of the work. Constructing a model, linking it to reality, and finding that it fits our expectations (captured in the “trivial conclusion”) and is robust to secondary factors is what’s valuable.

Think about the study of inflation. I’m sure lots of work has been done to show how low interest rates have impacted inflation. I won’t be surprised when they show how these interest rates have led to increased inflation, but I’ll be interested in the mechanics and model leading to the unsurprising result.

> And of course, in the end even talking about utility assumes the price someone is willing to pay reflects their utility gain. This is the most fundamental assumption in economics, but it's pretty clear that in the real world this is not the case. Especially for luxury goods such as air travel.

Why? I would expect luxury goods to reflect utility very accurately since they are not necessary purchases.

If you are paying $1k to go travel to Disney World, then that seems like a pretty good signal that the flight to Disney World gave you at least $1k worth of utility.

Does the $1k to go to Disney land buy the same utility as the $1k average yearly income in Bangladesh?

Or the utility a 80th percentile household in the US could buy for the same amount.

I have never heard of utility to be used as an objective measure. It is subjective, symbolizing an individual’s (perceived) value of a transaction relative to other possible transactions.

https://en.wikipedia.org/wiki/Utility

> a utility function that represents a single consumer's preference ordering over a choice set but is not comparable across consumers. This concept of utility is personal and based on choice

Of course utility is used as an objective measure. That's the basic foundation of utilitarianism, and utilitarianism is the ethical foundation of market economics.

The paper talks about maximizing "welfare" what is that if not an objective measure of utility?

Philosophers spend a lot of time trying to figure out a way to define an objective measure of utility that can be compared across different people. This is necessary for many formulations of utilitarianism. And probably many HN commenters are more familiar with the word in this context. That economists use the same word with a much more limited scope does tend to detract from discussions like this, I feel.

This discussion is specifically about economics, linked to an article in a prominent economics publication.

> even talking about utility assumes the price someone is willing to pay reflects their utility gain

It does. It reflects their utility gain relative to the utility they gain by spending that money somewhere else, or just keeping the money for the future. People not made of straw do not generally believe that the price someone is willing to pay reflects somebody else's utility. Nor are they unaware of the tendency for marginal utility to decrease.

> "Standard academic economics analysis is indifferent wether [sic] the producer or consumer gets the profits..."

that's an objective-sounding position to take, but it's certainly not, even from a purely detached, academic perspective. in most situations, consumer surplus is better for a market and for the overall economy, because it provides more choice points for more efficient allocation. in the unfortunately rare case of a relatively fair and competitive market, producer surplus can be a net good, making the overall market and economy more efficient, but in practice, companies have shown time and again to be pretty poor allocators of capital because they necessarily take fewer bets with larger amassed asset pools. however, economists generally (implicitly) assume a priori that markets are relatively fair and competitive in their analyses (akin to assuming frictionless infinite planes).

all that's to say, size does matter, negatively beyond some optimal point on the economies of scale/scope curves. as such, markets are at their best when populated primarily by small- to medium-sized companies, with no artificial barriers to new entrants (e.g., not the airline industry).

no matter the 'prestigiousness' of the journal, seemingly small (implicit) assumptions like this that can have huge implications on results necessitates skepticism toward academic economics.

> seemingly small (implicit) assumptions like this that can have huge implications on results necessitates skepticism toward academic economics

It mostly just means you need to be very careful in interpreting the results, or be careful when someone uses it to motivate policy prescriptions as they themselves may have a questionable interpretation — like with any academic finding.

Reply on news.ycombinator.com