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Price Discrimination and Focal Points for Tacit Collusion: Evidence from the Airline Industry

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Document pages: 42 pages

Abstract: We use unique data sets with round-the-clock posted fares and a regression discontinuity design to identify price discrimination in advance-purchase discounts. Price discrimination increases fares by 14 between two and one week before departure, and by 7.6 between three and two weeks to departure. While competition reduces price discrimination, it is unaffected by product variety for a multiproduct monopolist. The results show that the arbitrary thresholds of 7 and 14 days-in-advance serve as focal points for tacit collusion and to implement price discrimination in competitive markets. For round-trip tickets price discrimination depends on the days-in-advance for both the outbound and inbound flights.

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