"Marketplace Engineering: The Material Political Economy of Dynamic Pricing in the Airline Industry"

Dynamic pricing is nowadays widespread, from travel-related industries (airlines, railroads, hotels, car rentals) to online retailing, ride-hailing platforms, or concert ticket sellers. In these industries, and in many others, prices are fast-changing, detailed, and market-responsive. Dynamic pricing very much started in the U.S airline industry, following its deregulation in 1978. This paper reports on broader research on airline pricing, from a science and technology studies perspective, drawing on Donald MacKenzie’s ‘material political economy’ approach. The paper focusses on the first computerized pricing system in the airline industry – known to specialists as a revenue management system – DINAMO (for dynamic inventory maintenance optimizer), turned on by American Airlines in 1986. The paper reconstructs the genesis of DINAMO, based on 50 interviews with those who built DINAMO at American, or worked on similar systems in other airlines at the time, and an analysis of the technical material made public by American operations researchers at academic and industry conferences. The paper develops three main aspects. First, in the intensely competitive post deregulation environment, American Airlines used its pre-existing electronic commerce infrastructure, SABRE, to construct ‘pockets’ of market power, for specific customers, in specific times and places. Second, American developed a new way of making money, a form of price discrimination at the micro-market level, in an otherwise competitive market, exploiting specific signals in customers’ booking behavior, and technical affordances in the airline’s computerized reservation system. Lastly, American automated that money-making strategy in the 1980s. American Airlines operations researchers did not try to solve a pricing model borrowed from economics. They thought from the ‘materials at hand’: the capabilities of the electronic commerce infrastructure, the data collected by the reservation system, and the computing resources available for running their algorithm. These three features constitute, still today, the fundamental layers of airlines’ pricing systems.