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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, reecting 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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Paper provided by Toulouse School of Economics (TSE) in its series TSE Working Papers with number 14-478.

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Date of creation: 23 Mar 2014
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Handle: RePEc:tse:wpaper:28015

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

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  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 2012.14, Fondazione Eni Enrico Mattei.
  2. 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.
  3. 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.
  4. 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.
  5. Escobari, Diego, 2011. "Dynamic Pricing, Advance Sales, and Aggregate Demand Learning in Airlines," MPRA Paper 38509, University Library of Munich, Germany.
  6. Pascal Courty & Mario Pagliero, 2012. "The Impact of Price Discrimination on Revenue: Evidence from the Concert Industry," The Review of Economics and Statistics, MIT Press, vol. 94(1), pages 359-369, February.
  7. Harikesh Nair, 2007. "Intertemporal price discrimination with forward-looking consumers: Application to the US market for console video-games," Quantitative Marketing and Economics, Springer, Springer, vol. 5(3), pages 239-292, September.
  8. 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.
  9. 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, vol. 42(3), pages 649-70, August.
  10. Igal Hendel & Aviv Nevo, 2013. "Intertemporal Price Discrimination in Storable Goods Markets," American Economic Review, American Economic Association, vol. 103(7), pages 2722-51, December.
  11. 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.
  12. Phillip Leslie, 2004. "Price Discrimination in Broadway Theater," RAND Journal of Economics, The RAND Corporation, vol. 35(3), pages 520-541, Autumn.
  13. Gale, Ian L & Holmes, Thomas J, 1993. "Advance-Purchase Discounts and Monopoly Allocation of Capacity," American Economic Review, American Economic Association, vol. 83(1), pages 135-46, March.
  14. 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.
  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. Severin Borenstein, 1985. "Price Discrimination in Free-Entry Markets," RAND Journal of Economics, The RAND Corporation, vol. 16(3), pages 380-397, Autumn.
  17. 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.
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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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