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Price discrimination and business-cycle risk

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  • Marco Cornia
  • Kristopher S. Gerardi
  • Adam Hale Shapiro

Abstract

A parsimonious theoretical model of second degree price discrimination suggests that the business cycle will affect the degree to which firms are able to price-discriminate between different consumer types. We analyze price dispersion in the airline industry to assess how price discrimination can expose airlines to aggregate-demand fluctuations. Performing a panel analysis on seventeen years of data covering two business cycles, we find that price dispersion is highly procyclical. Estimates show that a rise in the output gap of 1 percentage point is associated with a 1.9 percent increase in the interquartile range of the price distribution in a market. These results suggest that markups move procyclically in the airline industry, such that during booms in the cycle, firms can significantly raise the markup charged to those with a high willingness to pay. The analysis suggests that this impact on firms' ability to price-discriminate results in additional profit risk, over and above the risk that comes from variations in cost.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Atlanta in its series Working Paper with number 2011-03.

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Date of creation: 2011
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Handle: RePEc:fip:fedawp:2011-03

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Cited by:
  1. Juan Pablo Herrera Saavedra & Jacobo Campo Robledo & Natalia Cantor Vargas & Jenny-Paola Lis-Gutiérrez, 2013. "Una propuesta metodológica de discriminación de segundo grado: el caso de tarifas multiclase para el registro marcario en Colombia durante el año 2012," ESTUDIOS ECONÓMICOS SIC 010746, SUPERINTENDENCIA DE INDUSTRIA Y COMERCIO.

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