Advanced Search
MyIDEAS: Login to save this paper or follow this series

Second-degree Price Discrimination and Inter-group Effects in Airline Routes between European Cities

Contents:

Author Info

  • Marco Alderighi

    (Universita della Valle d'Aosta, Aosta, Italy; Universita Bocconi, Italy)

  • Alessandro Cento

    (KLM Royal Dutch Airlines, Milano, Italy)

  • Peter Nijkamp

    (VU University Amsterdam)

  • Piet Rietveld

    (VU University Amsterdam)

Abstract

This paper presents a model of second-degree price discrimination and inter-group effects to describe the full-service pricing behaviour in the passenger aviation market. Consumer heterogeneity is assumed on both a horizontal and a vertical dimension, while various distinct market structures, some of which include low-cost carriers (LCCs), are considered. In the theoretical model framework, we derive that the rivalry between full-service carriers (FSCs) reduces fare differences between the business and leisure segments. Furthermore, the presence of LCCs increases fare gaps between leisure and business travellers, and it also induces FSCs to decrease fares in the leisure segment and eventually to increase them in the business one. This last outcome emerges from a change in passenger arrangements caused by inter-group effects. In our empirical analysis, we use data on published airfares of Lufthansa, British Airways, KLM and Alitalia for the main city-pairs from Italy to Germany, the UK and the Netherlands. Our results show that the empirical results provide support for our theoretical propositions.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://papers.tinbergen.nl/11118.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 11-118/3.

as in new window
Length:
Date of creation: 09 Aug 2011
Date of revision:
Handle: RePEc:dgr:uvatin:20110118

Contact details of provider:
Web page: http://www.tinbergen.nl

Related research

Keywords: Passenger aviation market; Price discrimination; Low-cost carriers;

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Armstrong, Mark & Vickers, John, 2001. "Competitive Price Discrimination," RAND Journal of Economics, The RAND Corporation, vol. 32(4), pages 579-605, Winter.
  2. Perloff, Jeffrey M. & Suslow, Valerie Y. & Seguin, Paul J., 1995. "Higher Prices from Entry: Pricing of Brand-Name Drugs," Competition Policy Center, Working Paper Series, Competition Policy Center, Institute for Business and Economic Research, UC Berkeley qt75g4k1nt, Competition Policy Center, Institute for Business and Economic Research, UC Berkeley.
  3. Austan Goolsbee & Chad Syverson, 2004. "How Do Incumbents Respond to the Threat of Entry? Evidence from the Major Airlines," Working Papers, NET Institute 04-04, NET Institute, revised Dec 2004.
  4. Michael D. Whinston & Scott C. Collins, 1992. "Entry and Competitive Structure in Deregulated Airline Markets: An Event Study Analysis of People Express," RAND Journal of Economics, The RAND Corporation, vol. 23(4), pages 445-462, Winter.
  5. Dessein, Wouter, 2003. " Network Competition in Nonlinear Pricing," RAND Journal of Economics, The RAND Corporation, vol. 34(4), pages 593-611, Winter.
  6. Douglas Staiger & James H. Stock, 1994. "Instrumental Variables Regression with Weak Instruments," NBER Technical Working Papers, National Bureau of Economic Research, Inc 0151, National Bureau of Economic Research, Inc.
  7. Armstrong, Mark, 2006. "Price discrimination," MPRA Paper 4693, University Library of Munich, Germany.
  8. Gould, John P, 1984. "Comments on "Firm-Specific Differentiation and Competition among Multiproduct Firms."," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 57(1), pages S173-77, January.
  9. Borenstein, Severin & Rose, Nancy L, 1994. "Competition and Price Dispersion in the U.S. Airline Industry," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 102(4), pages 653-83, August.
  10. Ward, Michael B. & Shimshack, Jay P. & Perloff, Jeffrey M. & Harris, J. Michael, 2002. "Effects of the private-label invasion in food industries," MPRA Paper 22186, University Library of Munich, Germany.
  11. Jean-Charles Rochet & Lars A. Stole, 2002. "Nonlinear Pricing with Random Participation," Review of Economic Studies, Oxford University Press, vol. 69(1), pages 277-311.
  12. Koen Pauwels & Shuba Srinivasan, 2004. "Who Benefits from Store Brand Entry?," Marketing Science, INFORMS, INFORMS, vol. 23(3), pages 364-390, July.
  13. Katz, Eliakim & Spiegel, Uriel, 1996. "Negative Intergroup Externalities and Market Demand," Economica, London School of Economics and Political Science, London School of Economics and Political Science, vol. 63(251), pages 513-19, August.
  14. J. Miguel Villas-Boas & Udo Schmidt-Mohr, 1999. "Oligopoly with Asymmetric Information: Differentiation in Credit Markets," RAND Journal of Economics, The RAND Corporation, vol. 30(3), pages 375-396, Autumn.
  15. Severin Borenstein, 1985. "Price Discrimination in Free-Entry Markets," RAND Journal of Economics, The RAND Corporation, vol. 16(3), pages 380-397, Autumn.
  16. Becker, Gary S, 1991. "A Note on Restaurant Pricing and Other Examples of Social Influences on Price," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 99(5), pages 1109-16, October.
  17. Ron Borzekowski & Raphael Thomadsen & Charles Taragin, 2009. "Competition and price discrimination in the market for mailing lists," Quantitative Marketing and Economics, Springer, Springer, vol. 7(2), pages 147-179, June.
  18. Steven A. Morrison, 2001. "Actual, Adjacent, and Potential Competition Estimating the Full Effect of Southwest Airlines," Journal of Transport Economics and Policy, London School of Economics and University of Bath, London School of Economics and University of Bath, vol. 35(2), pages 239-256, May.
  19. Holmes, Thomas J, 1989. "The Effects of Third-Degree Price Discrimination in Oligopoly," American Economic Review, American Economic Association, American Economic Association, vol. 79(1), pages 244-50, March.
  20. Giaume, Stephanie & Guillou, Sarah, 2004. "Price discrimination and concentration in European airline markets," Journal of Air Transport Management, Elsevier, Elsevier, vol. 10(5), pages 305-310.
  21. Diego Escobari & Li Gan, 2007. "Price Dispersion under Costly Capacity and Demand Uncertainty," NBER Working Papers 13075, National Bureau of Economic Research, Inc.
  22. Evans, William N & Kessides, Ioannis N, 1993. "Localized Market Power in the U.S. Airline Industry," The Review of Economics and Statistics, MIT Press, vol. 75(1), pages 66-75, February.
  23. David P. Myatt & Justin P. Johnson, 2002. "Multiproduct Quality Competition: Fighting Brands and Product Line Pruning," Economics Series Working Papers, University of Oxford, Department of Economics 105, University of Oxford, Department of Economics.
  24. Windle, Robert & Dresner, Martin, 1999. "Competitive responses to low cost carrier entry," Transportation Research Part E: Logistics and Transportation Review, Elsevier, Elsevier, vol. 35(1), pages 59-75, March.
  25. Katz, Michael L, 1984. "Firm-Specific Differentiation and Competition among Multiproduct Firms," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 57(1), pages S149-66, January.
  26. James D. Dana Jr., 1999. "Equilibrium Price Dispersion Under Demand Uncertainty: The Roles of Costly Capacity and Market Structure," RAND Journal of Economics, The RAND Corporation, vol. 30(4), pages 632-660, Winter.
  27. Moorthy, K Sridhar, 1984. "Comments on "Firm-Specific Differentiation and Competition among Multiproduct Firms."," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 57(1), pages S167-71, January.
  28. Kristopher S. Gerardi & Adam Hale Shapiro, 2009. "Does Competition Reduce Price Dispersion? New Evidence from the Airline Industry," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 117(1), pages 1-37, 02.
  29. Yang, Huanxing & Ye, Lixin, 2008. "Nonlinear pricing, market coverage, and competition," Theoretical Economics, Econometric Society, Econometric Society, vol. 3(1), March.
  30. Preyas S. Desai, 2001. "Quality Segmentation in Spatial Markets: When Does Cannibalization Affect Product Line Design?," Marketing Science, INFORMS, INFORMS, vol. 20(3), pages 265-283, August.
  31. Marcus Asplund & Rickard Eriksson & Niklas Strand, 2008. "PRICE DISCRIMINATION IN OLIGOPOLY: EVIDENCE FROM REGIONAL NEWSPAPERS -super-* ," Journal of Industrial Economics, Wiley Blackwell, Wiley Blackwell, vol. 56(2), pages 333-346, 06.
  32. Steven C. Salop, 1979. "Monopolistic Competition with Outside Goods," Bell Journal of Economics, The RAND Corporation, The RAND Corporation, vol. 10(1), pages 141-156, Spring.
  33. Robert C. Blattberg & Kenneth J. Wisniewski, 1989. "Price-Induced Patterns of Competition," Marketing Science, INFORMS, INFORMS, vol. 8(4), pages 291-309.
  34. Liu Qihong & Serfes Konstantinos, 2011. "Third-Degree Price Discrimination," Journal of Industrial Organization Education, De Gruyter, De Gruyter, vol. 5(1), pages 1-23, March.
  35. Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, Elsevier, vol. 18(2), pages 301-317, August.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Diego Escobari & Sang-Yeob Lee, 2012. "Demand shifting across flights and airports in a spatial competition model," Letters in Spatial and Resource Sciences, Springer, Springer, vol. 5(3), pages 175-183, October.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:dgr:uvatin:20110118. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Antoine Maartens (+31 626 - 160 892)).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.