Airlines, hotel companies, anything with a date attached, know they have you on the hook the closer to that date because no one buys airline tickets for tomorrow unless they are desperate, and there are fewer tickets available, so capitalism says you consumers will pay more because they must.

But even William Shatner knows the airline seat or hotel room has no value for the corporation either, once it is gone - he works for a corporation that makes money selling last-minute fares and hotel rooms because it is an asset that expires. That can be your advantage also because airlines and others don't want to fly empty so they often have the 'best' prices on a limited number of seats long in advance in order to break even.   Buying in advance makes sense also.



So assuming you don't want to get stuck in a lousy hotel because good ones are sold, or you are not desperate to fly tomorrow, what is the best strategy, buy in advance or wait until the last minute?

Professors Marc Möller and Makoto Watanabe from the Carlos III University of Madrid Department of Economics did a new study and considered the pricing of products that can be purchased in advance, i.e., long before their actual date of consumption, and discussed the two determining factors for optimal planning for prices, namely: 

(1) When purchasing early, consumers face uncertainty with respect to their own future demands. "When we reserve our flight to London weeks ahead we have to take into account the possibility that unforeseen circumstances could keep us from traveling to London", the study's authors explained. "In order to make consumers take their chances, airlines have to offer advance purchase discounts. As a consequence ticket prices increase as the travel date approaches."

(2) When purchasing late, consumers face the risk of becoming rationed. If you purchase a theater ticket last minute, there exists the possibility that the event has sold out. In order to make consumers bear this risk, theaters implement a clearance sale by offering last minute discounts. So unlike airlines, ticket prices decrease on the day of the performance

Obviously the optimal dynamic pricing strategy depends on the interplay between individual demand uncertainty and rationing risk but rationing risks depend on a comparison of demand and supply and hence on the seller's capacity. Differences in dynamic pricing can therefore be explained by differences in capacities.

Möller and Watanabe show that advance purchase discounts will be employed by sellers whose capacity is relatively small in comparison to demand whereas clearance sales are optimal when capacities are large. Hence differences in the pricing of airline and theater tickets can be explained by the fact that air travel to London is a relatively tight market while the long running musicals of London's West End are very unlikely to become sold out.

Thire article shows further that clearance sales are more likely and advance purchase discounts are less likely to be observed in markets where prices can be committed to in advance, temporal capacity limits are difficult to implement, and resale is feasible. These results provide further reason for the observed differences in pricing.

So what did they find?  In his ongoing research Watanabe has found that air fares are lowest around eight weeks before the travel date. Moreover, it seems as if tickets are cheaper when purchased in the afternoons, rather than the mornings. Do airlines price discriminate between business travelers who book their tickets at work and leisure travelers who book from home? That claim still has not been confirmed.

Citation: Marc Möller, Makoto Watanabe, 'Advance Purchase Discounts Versus Clearance Sales', The Economic Journal Volume 120, Issue 547, pages 1125–1148, September 2010 DOI: 10.1111/j.1468-0297.2009.02324.x