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Airline Pricing Behaviour under Limited Intermodal Competition

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  • Bergantino, Angela Stefania
  • Capozza, Claudia

Abstract

This paper empirically analyses airline pricing for short-haul flights in contexts with no credible threat of inter-modal competition. To this end, we explore the southern Italian market since it is less accessible by other transport modes and thus fares are the direct outcome of air-related competition. We show, in fact, that market power matters, depending on the level of intra-modal competition, and that airlines apply differentiated mark-ups. Besides, consistent with the implementation of inter-temporal price discrimination (IPD), we find a non-monotonic inter-temporal profile of fares with a turning point included in the interval of the 43th to 45th days before departure. Finally, we provide evidence that in more competitive markets, airlines are more likely to engage in IPD.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 48892.

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Date of creation: 27 Nov 2013
Date of revision: 27 Nov 2013
Handle: RePEc:pra:mprapa:48892

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Keywords: airfares; market structure; intertemporal price discrimination;

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References

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  1. Alberto A. Gaggero & Claudio A. Piga, 2011. "Airline Market Power and Intertemporal Price Dispersion," Journal of Industrial Economics, Wiley Blackwell, vol. 59(4), pages 552-577, December.
  2. Giaume, Stephanie & Guillou, Sarah, 2004. "Price discrimination and concentration in European airline markets," Journal of Air Transport Management, Elsevier, vol. 10(5), pages 305-310.
  3. James D. Dana & Jr., 1998. "Advance-Purchase Discounts and Price Discrimination in Competitive Markets," Journal of Political Economy, University of Chicago Press, vol. 106(2), pages 395-422, April.
  4. Brueckner, Jan K. & Lee, Darin & Singer, Ethan S., 2013. "Airline competition and domestic US airfares: A comprehensivereappraisal," Economics of Transportation, Elsevier, vol. 2(1), pages 1-17.
  5. Volodymyr Bilotkach & Alberto A. Gaggero & Claudio A. Piga, 2011. "Airline Pricing under Different Market Conditions: Evidence from European Low-Cost Carriers," Working Paper Series 47_11, The Rimini Centre for Economic Analysis.
  6. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, December.
  7. Mantin, Benny & Koo, Bonwoo, 2009. "Dynamic price dispersion in airline markets," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 45(6), pages 1020-1029, November.
  8. Shane Carbonneau & Preston McAfee & Hugo Mialon & Sue Mialon, 2004. "Price Discrimination and Market Power," Emory Economics 0413, Department of Economics, Emory University (Atlanta).
  9. 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.
  10. Severin Borenstein, 1985. "Price Discrimination in Free-Entry Markets," RAND Journal of Economics, The RAND Corporation, vol. 16(3), pages 380-397, Autumn.
  11. Borenstein, Severin & Rose, Nancy L, 1994. "Competition and Price Dispersion in the U.S. Airline Industry," Journal of Political Economy, University of Chicago Press, vol. 102(4), pages 653-83, August.
  12. Stokey, Nancy L, 1979. "Intertemporal Price Discrimination," The Quarterly Journal of Economics, MIT Press, vol. 93(3), pages 355-71, August.
  13. Gale, I.L. & Holmes, T.J., 1990. "Advance-Purchase Discounts And Monopoly Allocation Of Capacity," Working papers 9005, Wisconsin Madison - Social Systems.
  14. Kathy J. Hayes & Leola B. Ross, 1998. "Is Airline Price Dispersion the Result of Careful Planning or Competitive Forces?," Review of Industrial Organization, Springer, vol. 13(5), pages 523-541, October.
  15. Holmes, Thomas J, 1989. "The Effects of Third-Degree Price Discrimination in Oligopoly," American Economic Review, American Economic Association, vol. 79(1), pages 244-50, March.
  16. Marc Möller & Makoto Watanabe, 2010. "Advance Purchase Discounts Versus Clearance Sales," Economic Journal, Royal Economic Society, vol. 120(547), pages 1125-1148, 09.
  17. Claudio A. Piga & Enrico Bachis, 2006. "Pricing strategies by European traditional and low cost airlines. Or, when is it the best time to book on line?," Discussion Paper Series 2006_14, Department of Economics, Loughborough University, revised Jul 2006.
  18. Carlos F. Alves & Cristina Barbot, 2009. "Price Discrimination Strategies of Low-cost Carriers," Journal of Transport Economics and Policy, London School of Economics and University of Bath, vol. 43(3), pages 345-363, September.
  19. 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.
  20. Fredrik Carlsson, 2004. "Prices and Departures in European Domestic Aviation Markets," Review of Industrial Organization, Springer, vol. 24(1), pages 37-49, 02.
  21. Claudio A. Piga & Enrico Bachis, 2007. "Hub Premium, Airport Dominance and Market Power in the European Airline Industry," Discussion Paper Series 2007_11, Department of Economics, Loughborough University, revised Apr 2007.
  22. Gale, Ian L. & Holmes, Thomas J., 1992. "The efficiency of advance-purchase discounts in the presence of aggregate demand uncertainty," International Journal of Industrial Organization, Elsevier, vol. 10(3), pages 413-437, September.
  23. 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.
  24. David R. Graham & Daniel P. Kaplan & David S. Sibley, 1983. "Efficiency and Competition in the Airline Industry," Bell Journal of Economics, The RAND Corporation, vol. 14(1), pages 118-138, Spring.
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Cited by:
  1. 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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