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Third-degree Price Discrimination in the Presence of Congestion Externality

Author

Listed:
  • Achim I. Czerny

    (VU University Amsterdam, the Netherlands)

  • Anming Zhang

    (The University of British Columbia, Canada)

Abstract

This paper analyzes third-degree price discrimination of a monopoly airline in the presence of congestion externality when all markets are served. The model features the business-passenger and leisure-passenger markets where business passengers exhibit a higher time valuation, and a less price-elastic demand, than leisure passengers. Our main result is the identification of the time-valuation effect of price discrimination, which can work in the opposite direction as the well-known output effect on welfare. This time-valuation effect clearly explains why discriminating prices can improve welfare even when this is associated with a reduction in aggregate output.

Suggested Citation

  • Achim I. Czerny & Anming Zhang, 2014. "Third-degree Price Discrimination in the Presence of Congestion Externality," Tinbergen Institute Discussion Papers 14-140/VIII, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:20140140
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    References listed on IDEAS

    as
    1. W. Leontief, 1940. "The Theory of Limited and Unlimited Discrimination," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 54(3), pages 490-501.
    2. Stephen K. Layson, 1998. "Third‐Degree Price Discrimination With Interdependent Demands," Journal of Industrial Economics, Wiley Blackwell, vol. 46(4), pages 511-524, December.
    3. Nahata, Babu & Ostaszewski, Krzysztof & Sahoo, P K, 1990. "Direction of Price Changes in Third-Degree Price Discrimination," American Economic Review, American Economic Association, vol. 80(5), pages 1254-1258, December.
    4. Niskanen, Esko, 1987. "Congestion tolls and consumer welfare," Transportation Research Part B: Methodological, Elsevier, vol. 21(2), pages 171-174, April.
    5. Layson, Stephen K, 1998. "Third-Degree Price Discrimination with Interdependent Demands," Journal of Industrial Economics, Wiley Blackwell, vol. 46(4), pages 511-524, December.
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    Citations

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    Cited by:

    1. Czerny, Achim I. & Zhang, Anming, 2014. "Airport congestion pricing when airlines price discriminate," Transportation Research Part B: Methodological, Elsevier, vol. 65(C), pages 77-89.
    2. Czerny, Achim I. & Zhang, Anming, 2015. "How to mix per-flight and per-passenger based airport charges," Transportation Research Part A: Policy and Practice, Elsevier, vol. 71(C), pages 77-95.
    3. Adriaan Hendrik van der Weijde, 2014. "Price Differentiation and Discrimination in Transport Networks," Tinbergen Institute Discussion Papers 14-099/VIII, Tinbergen Institute.
    4. Achim I. Czerny & Vincent A.C. van den Berg & Erik T. Verhoef, 2015. "Complementary Alliances with Endogenous Fleets and Load Factors," Tinbergen Institute Discussion Papers 15-134/VIII, Tinbergen Institute.

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    More about this item

    Keywords

    Price discrimination; congestion; time valuation; monopoly; airline;
    All these keywords.

    JEL classification:

    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • L93 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Air Transportation

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