Prof. James Dana

Faculty Research: Jim Dana, Management & Strategy

The plane truth

By Daniel Cattau

Airline pricing is no mystery to Professor James Dana

Any frequent flyer might become uneasy visiting James D. Dana Jr.'s sixth floor corner office at the Kellogg School of Management. On top of a file cabinet, four commercial airplane models stand conspicuously in front of a pint-sized slot machine.

It's clear that Dana, 42, an associate professor of management and strategy who studies airline-pricing strategies, has a witty sense of humor. Yet he sees more rational forces at work in the industry that sometimes resembles a down-and-out gambler.

"It's ironic that airlines have all these sophisticated pricing strategies, and they don't make any money," he says.

Indeed, nearly as much math goes into figuring these strategies as calculating the planes' take-off and landing patterns.

Dana's research on the airline industry shows, among other things, that the business travelers' view of "price gouging" is largely a myth; they too benefit from the complex system of advance purchases aimed largely at leisure travelers. He argues that airlines employ these sophisticated pricing strategies because they bear significant costs for flying empty seats.

By the late 1990s, Dana says the major airlines (American, Delta, United) were on the verge of sustained profitability, but the events of Sept. 11, 2001, showed they're sensitive to unexpected economic shocks.

For Dana, economics is all in the family. He is married to Kathryn Spier, also professor of management and strategy at Kellogg. (They have a son who will be 9 in August). His father is a retired professor of economics at Lawrence University, Appleton, Wis. Both father and son graduated from Yale University as undergraduates and received their doctorates from the Massachusetts Institute of Technology.

Shortly after coming to Kellogg in 1994 from teaching positions at the University of Chicago and Dartmouth College, Dana suffered a brain aneurysm and then a stroke. He was given less than a 50-50 chance of survival.

The recovery was long and difficult, yet he considers himself "extremely fortunate" in two respects. Before the stroke, he explains, "you feel like you're entitled to your life; now I view life as a gift." In addition, Dana has not lost the ability to do what he loves most — research and teaching.

In person, Dana is engaging and funny, and his interests are wide ranging. In conversation, he incorporates examples from various disciplines — including marketing, operations research and economics. He discusses with equal ease pricing strategies and consumer demand in the airline industry, Blockbuster Video, grocery stores, and even newer Major League Baseball stadiums.

His use of highly complex mathematical models in his research papers may make his findings difficult for wide public debate and dissemination, but his work sheds light on the often mystifying world of airlines and their practices. The research, he says, seeks to answer a relatively simple question: "How do markets allocate the costs of unused travel?"

Airline industry executives have sometimes claimed that, in effect, pleasure travel subsidizes business travel, not the other way around.

Dana, not a spokesperson for the industry, would be hard pressed to disagree. Pleasure travelers use seats that would otherwise fly empty, making it possible for airlines to compete more vigorously for business travelers.

His research emphasizes differences in consumer behavior when supply is scarce and demand high, versus the current market situation, with relatively low consumer demand and an excess supply of planes, favors both low-cost airlines (such as Southwest and America West) and corporate travelers.

"As long as demand remains soft, business travelers do not need to pay a premium for the conveniences of having their preferred departure time, because capacity is readily available," Dana explains.

Now about that in-flight meal...

About Professor James Dana
Prof. Dana is an economist whose research interests include the pricing under demand uncertainty, the theoretical analysis of price dispersion and price discrimination, and other topics in theoretical industrial organization. He applies this research to developing more effective strategies for managing demand uncertainty, particularly in the airline and entertainment industries.

Representative publications include: "Competition in Price and Availability when Availability is Unobservable," the RAND Journal of Economics, Vol. 32, No. 3; and "Monopoly Price Dispersion Under Demand Uncertainty," International Economic Review, Vol. 42, No. 3.

He is an associate editor of the Journal of Industrial Economics.