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Price Discrimination in International Airline Markets

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Document pages: 54 pages

Abstract: We develop a model of inter-temporal and intra-temporal price discrimination by monopoly airlines to study the ability of different discriminatory pricing mechanisms to increase efficiency and the associated distributional implications. To estimate the model, we use unique data from international airline markets with flight-level variation in prices across time, cabins, and markets, as well as information on passengers’ reasons for travel and time of purchase. We find that the ability to screen passengers across cabins every period increases total surplus by 35 relative to choosing only one price per period, with both the airline and passengers benefiting. However, further discrimination based on passenger’s reason to traveling improve airline surplus at the expense of total efficiency. We also find that the current pricing practice yields ap- proximately 89 of the first-best welfare. The source of this inefficiency arises mostly from dynamic uncertainty about demand, not private information about passenger valuations.

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