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Dynamic Oligopoly Pricing: Evidence from the Airline Industry

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  • Siegert, Caspar
  • Ulbricht, Robert

Abstract

We explore how pricing dynamics in the European airline industry vary with the competitive environment. Our results highlight substantial variations in pricing dynamics that are consistent with a theory of intertemporal price discrimination. First, the rate at which prices increase towards the scheduled travel date is decreasing in competition, supporting the idea that competition restrains the ability of airlines to price-discriminate. Second, the sensitivity to competition is substantially increasing in the heterogeneity of the customer base, reflecting further that restraints on price discrimination are only relevant if there is initial scope for price discrimination. These patterns are quantitatively important, explaining about 83 percent of the total within-flight price dispersion, and explaining 17 percent of the observed cross-market variation of pricing dynamics.

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Bibliographic Info

Paper provided by Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich in its series Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems with number 463.

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Date of creation: 23 Mar 2014
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Handle: RePEc:trf:wpaper:463

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Keywords: Airline industry; capacity constraints; dynamic oligopoly pricing; intertemporal price dispersion; price discrimination;

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  1. Nair, Harikesh, S., 2006. "Intertemporal Price Discrimination with Forward-Looking Consumers: Application to the US Market for Console Video-Games," Research Papers 1947, Stanford University, Graduate School of Business.
  2. Austan Goolsbee & Chad Syverson, 2008. "How do Incumbents Respond to the Threat of Entry? Evidence from the Major Airlines," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 123(4), pages 1611-1633, November.
  3. Severin Borenstein, 1985. "Price Discrimination in Free-Entry Markets," RAND Journal of Economics, The RAND Corporation, vol. 16(3), pages 380-397, Autumn.
  4. 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.
  5. Phillip Leslie, 2004. "Price Discrimination in Broadway Theater," RAND Journal of Economics, The RAND Corporation, vol. 35(3), pages 520-541, Autumn.
  6. Holmes, Thomas J, 1989. "The Effects of Third-Degree Price Discrimination in Oligopoly," American Economic Review, American Economic Association, American Economic Association, vol. 79(1), pages 244-50, March.
  7. Gale, Ian L & Holmes, Thomas J, 1993. "Advance-Purchase Discounts and Monopoly Allocation of Capacity," American Economic Review, American Economic Association, American Economic Association, vol. 83(1), pages 135-46, March.
  8. Kathy J. Hayes & Leola B. Ross, 1998. "Is Airline Price Dispersion the Result of Careful Planning or Competitive Forces?," Review of Industrial Organization, Springer, Springer, vol. 13(5), pages 523-541, October.
  9. Alberto A. Gaggero & Claudio A. Piga, 2009. "Airline Market Power and Intertemporal Price Dispersion," Discussion Paper Series 2009_10, Department of Economics, Loughborough University, revised Jul 2009.
  10. Pascal Courty & Mario Pagliero, 2009. "The Impact of Price Discrimination on Revenue: Evidence from the Concert Industry," Economics Working Papers, European University Institute ECO2009/04, European University Institute.
  11. Igal Hendel & Aviv Nevo, 2011. "Intertemporal Price Discrimination in Storable Goods Markets," NBER Working Papers 16988, National Bureau of Economic Research, Inc.
  12. Jan K. Brueckner & Nichola J. Dyer & Pablo T. Spiller, 1992. "Fare Determination in Airline Hub-and-Spoke Networks," RAND Journal of Economics, The RAND Corporation, vol. 23(3), pages 309-333, Autumn.
  13. 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, University of Chicago Press, vol. 117(1), pages 1-37, 02.
  14. James D. Dana & Jr., 1998. "Advance-Purchase Discounts and Price Discrimination in Competitive Markets," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 106(2), pages 395-422, April.
  15. 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, Elsevier, vol. 10(3), pages 413-437, September.
  16. Dana, James D, Jr, 2001. "Monopoly Price Dispersion under Demand Uncertainty," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(3), pages 649-70, August.
  17. Diego Escobari, 2012. "Dynamic Pricing, Advance Sales and Aggregate Demand Learning in Airlines," Journal of Industrial Economics, Wiley Blackwell, Wiley Blackwell, vol. 60(4), pages 697-724, December.
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Cited by:
  1. Diego, Escobari, 2014. "Estimating Dynamic Demand for Airlines," MPRA Paper 55408, University Library of Munich, Germany.

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