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Demand shifting across flights and airports in a spatial competition model

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  • Escobari, Diego
  • Lee, Sang-Yeob

Abstract

This paper investigates the nature of day-to-day competition between flights using a unique panel data set on prices and inventories. We use instrumental variables methods and several spatial autoregressive models (SAR) to estimate price reaction functions. The primary source of product differentiation is departure time. After controlling for flight-specific characteristics and various sources of price dispersion, we find important evidence of demand shifting between competing flights. Most of the shift is being captured by flights scheduled to depart within a 3-hour window. We find no evidence of demand shifting between airports.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 38799.

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Date of creation: 17 Apr 2012
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Handle: RePEc:pra:mprapa:38799

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Keywords: Spatial Autoregressive Models; Competition; Demand Shifting; Airlines;

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References

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  1. 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, vol. 117(1), pages 1-37, 02.
  2. Severin Borenstein & Nancy L. Rose, 1995. "Competition and Price Dispersion in the U.S. Airline Industry," NBER Working Papers 3785, National Bureau of Economic Research, Inc.
  3. Prescott, Edward C, 1975. "Efficiency of the Natural Rate," Journal of Political Economy, University of Chicago Press, vol. 83(6), pages 1229-36, December.
  4. Escobari, Diego, 2009. "Systematic peak-load pricing, congestion premia and demand diverting: Empirical evidence," Economics Letters, Elsevier, vol. 103(1), pages 59-61, April.
  5. Joanna Stavins, 1996. "Price discrimination in the airline market: the effect of market concentration," Working Papers 96-7, Federal Reserve Bank of Boston.
  6. 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.
  7. Escobari, Diego, 2011. "Dynamic Pricing, Advance Sales, and Aggregate Demand Learning in Airlines," MPRA Paper 38509, University Library of Munich, Germany.
  8. Joris Pinkse & Margaret E. Slade & Craig Brett, 2002. "Spatial Price Competition: A Semiparametric Approach," Econometrica, Econometric Society, vol. 70(3), pages 1111-1153, May.
  9. 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.
  10. Lung-fei Lee, 2003. "Best Spatial Two-Stage Least Squares Estimators for a Spatial Autoregressive Model with Autoregressive Disturbances," Econometric Reviews, Taylor & Francis Journals, vol. 22(4), pages 307-335.
  11. Kelejian, Harry H & Prucha, Ingmar R, 1998. "A Generalized Spatial Two-Stage Least Squares Procedure for Estimating a Spatial Autoregressive Model with Autoregressive Disturbances," The Journal of Real Estate Finance and Economics, Springer, vol. 17(1), pages 99-121, July.
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Cited by:
  1. Escobari, Diego & Lee, Jim, 2013. "Demand Uncertainty and Capacity Utilization in Airlines," MPRA Paper 46059, University Library of Munich, Germany.
  2. Escobari, Diego & Mellado, Cristhian, 2013. "The Choice of Airport, Airline, and Departure Date and Time: Estimating the Demand for Flights," MPRA Paper 47943, University Library of Munich, Germany.

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