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Price Dispersion under Costly Capacity and Demand Uncertainty

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  • Diego Escobari
  • Li Gan

Abstract

This paper tests the empirical importance of the price dispersion predictions of the Prescott-Eden-Dana (PED) models. Equilibrium price dispersion is derived in a setting with costly capacity and demand uncertainty where different fares can be explained by the different selling probabilities. The PED models predict that a lower selling probability leads to a higher price. Moreover, this effect is larger in more competitive markets. Despite its applications to several important market phenomena, there exists little empirical evidence supporting the PED models, mostly because of the difficulty of coming up with an appropriate measure of the selling probabilities. Using a unique panel of U.S. airline fares and seat inventories, we find evidence that strongly supports both predictions of the models. After controlling for the effect of aggregate demand uncertainty on fares, we also obtain evidence of second degree price discrimination in the form of advance-purchase discounts.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13075.

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Date of creation: May 2007
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Handle: RePEc:nbr:nberwo:13075

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Citations

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Cited by:
  1. Marco Alderighi & Marcella Nicolini & Claudio A. Piga, 2012. "Combined Effects of Load Factors and Booking Time on Fares: Insights from the Yield Management of a Low-Cost Airline," Working Papers, Fondazione Eni Enrico Mattei 2012.14, Fondazione Eni Enrico Mattei.
  2. Escobari, Diego & Jindapon, Paan, 2014. "Price Discrimination through Refund Contracts in Airlines," MPRA Paper 53629, University Library of Munich, Germany.
  3. Escobari, Diego, 2009. "Systematic peak-load pricing, congestion premia and demand diverting: Empirical evidence," Economics Letters, Elsevier, Elsevier, vol. 103(1), pages 59-61, April.
  4. Volodymyr Bilotkach & Alberto A. Gaggero & Claudio A. Piga, 2012. "Airline Pricing under Different Market Conditions: evidence from European Low-Cost Carriers," Discussion Paper Series 2012_01, Department of Economics, Loughborough University, revised Jan 2012.
  5. Escobari, Diego & Lee, Jim, 2013. "Demand Uncertainty and Capacity Utilization in Airlines," MPRA Paper 46059, University Library of Munich, Germany.
  6. Marco Alderighi & Alessandro Cento & Peter Nijkamp & Piet Rietveld, 2011. "Second-degree Price Discrimination and Inter-group Effects in Airline Routes between European Cities," Tinbergen Institute Discussion Papers 11-118/3, Tinbergen Institute.
  7. Diego Escobari, 2013. "Asymmetric Price Adjustments in Airlines," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 34(2), pages 74-85, 03.
  8. Andrew Sweeting, 2008. "Equilibrium Price Dynamics in Perishable Goods Markets: The Case of Secondary Markets for Major League Baseball Tickets," NBER Working Papers 14505, National Bureau of Economic Research, Inc.
  9. Steven L. Puller & Anirban Sengupta & Steven N. Wiggins, 2009. "Testing Theories of Scarcity Pricing in the Airline Industry," NBER Working Papers 15555, National Bureau of Economic Research, Inc.
  10. repec:dgr:uvatin:2011118 is not listed on IDEAS
  11. Mantin, Benny & Koo, Bonwoo, 2009. "Dynamic price dispersion in airline markets," Transportation Research Part E: Logistics and Transportation Review, Elsevier, Elsevier, vol. 45(6), pages 1020-1029, November.
  12. Volodymyr Bilotkach & Nicholas G. Rupp & Vivek Pai, 2013. "Value of a Platform to a Seller: Case of American Airlines and Online Travel Agencies," Working Papers, NET Institute 13-08, NET Institute.
  13. Alderighi, Marco, 2010. "Fare dispersions in airline markets: A quantitative assessment of theoretical explanations," Journal of Air Transport Management, Elsevier, Elsevier, vol. 16(3), pages 144-150.
  14. Escobari, Diego, 2011. "Dynamic Pricing, Advance Sales, and Aggregate Demand Learning in Airlines," MPRA Paper 38509, University Library of Munich, Germany.
  15. Arnold, Michael A. & Saliba, Christine, 2011. "Asymmetric capacity constraints and equilibrium price dispersion," Economics Letters, Elsevier, Elsevier, vol. 111(2), pages 158-160, May.
  16. Raymond Deneckere & James Peck, 2012. "Dynamic Competition With Random Demand and Costless Search: A Theory of Price Posting," Econometrica, Econometric Society, Econometric Society, vol. 80(3), pages 1185-1247, 05.

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