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Airline Market Power and Intertemporal Price Dispersion

Author Info

  • Alberto A. Gaggero
  • Claudio A. Piga

Abstract

This paper analyzes the empirical relationship between market structure and price dispersion in the airline markets connecting the UK and the Republic of Ireland. Price dispersion is measured by a number of inequality indexes, calculated using fares posted on the Internet at specific days before takeoff. We find a negative correlation between market dominance and price dispersion; thus competition appears to hinder the airlines' ability to price discriminate to exploit consumers' heterogeneity in booking time preferences. Moreover, in the Christmas and Easter periods of high demand, fares are less dispersed, possibly because airlines target a less heterogenous set of consumers.

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Article provided by Wiley Blackwell in its journal The Journal of Industrial Economics.

Volume (Year): 59 (2011)
Issue (Month): 4 (December)
Pages: 552-577

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Handle: RePEc:bla:jindec:v:59:y:2011:i:4:p:552-577
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Find related papers by JEL classification:
  • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
  • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
  • L93 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Air Transportation

References listed on IDEAS
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  1. 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.
  2. 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.
  3. 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.
  4. Severin Borenstein & Nancy L. Rose, 1991. "Competition and Price Dispersion in the U.S. Airline Industry," NBER Working Papers 3785, National Bureau of Economic Research, Inc.
  5. Severin Borenstein, 1985. "Price Discrimination in Free-Entry Markets," RAND Journal of Economics, The RAND Corporation, vol. 16(3), pages 380-397, Autumn.
  6. repec:att:wimass:9214 is not listed on IDEAS
  7. 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.
  8. repec:att:wimass:9005 is not listed on IDEAS
  9. Varian, Hal R., 1989. "Price discrimination," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 1, chapter 10, pages 597-654 Elsevier.
  10. 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.
  11. Stole, Lars A., 2007. "Price Discrimination and Competition," Handbook of Industrial Organization, Elsevier.
  12. 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.
  13. Stokey, Nancy L, 1979. "Intertemporal Price Discrimination," The Quarterly Journal of Economics, MIT Press, vol. 93(3), pages 355-71, August.
  14. Lars Osberg, 1998. "Economic Insecurity," Discussion Papers 0088, University of New South Wales, Social Policy Research Centre.
  15. 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.
  16. 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.
  17. 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.
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Cited by:

  1. Siegert, Caspar & Ulbricht, Robert, 2014. "Dynamic Oligopoly Pricing: Evidence from the Airline Industry," TSE Working Papers 14-478, Toulouse School of Economics (TSE).
  2. Evangelinos, Christos & Obermeyer, Andy & Püschel, Ronny, 2011. "Preisdispersion und Wettbewerb im Luftverkehr: Ein theoretischer und empirischer Überblick," Discussion Papers 2/2011, Dresden University of Technology, Faculty of Transportation and Traffic Sciences "Friedrich List", Institute for Transport and Economics.
  3. Bergantino, Angela Stefania & Capozza, Claudia, 2013. "Airline Pricing Behaviour under Limited Intermodal Competition," MPRA Paper 48892, University Library of Munich, Germany, revised 27 Nov 2013.
  4. Marc Möller & Makoto Watanabe, 2013. "Competition in the Presence of Individual Demand Uncertainty," CESifo Working Paper Series 4490, CESifo Group Munich.
  5. repec:dgr:uvatin:20130185 is not listed on IDEAS
  6. 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.
  7. Diego Escobari, 2013. "Asymmetric Price Adjustments in Airlines," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 34(2), pages 74-85, 03.
  8. Obermeyer, Andy & Evangelinos, Christos & Püschel, Ronny, 2013. "Price dispersion and competition in European airline markets," Journal of Air Transport Management, Elsevier, vol. 26(C), pages 31-34.
  9. Roma, Paolo & Zambuto, Fabio & Perrone, Giovanni, 2014. "Price dispersion, competition, and the role of online travel agents: Evidence from business routes in the Italian airline market," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 69(C), pages 146-159.
  10. Marco Cornia & Kristopher S. Gerardi & Adam Hale Shapiro, 2012. "Price Dispersion Over the Business Cycle: Evidence from the Airline Industry," Journal of Industrial Economics, Wiley Blackwell, vol. 60(3), pages 347-373, 09.
  11. Seongman Moon & Makoto Watanabe, 2011. "Refundability and Price: Empirical Analysis on the Airline Industry," Working Papers 1107, Research Institute for Market Economy, Sogang University.
  12. Marco Alderighi & Alberto A. Gaggero & Claudio A. Piga, 2014. "The effect of code-share agreements on the temporal profile of airline fares," Working Paper Series 27_14, The Rimini Centre for Economic Analysis.
  13. 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," Quaderni di Dipartimento 171, University of Pavia, Department of Economics and Quantitative Methods.
  14. Birg, Laura & Goeddeke, Anna, 2014. "Christmas economics: A sleigh ride," Center for European, Governance and Economic Development Research Discussion Papers 220, University of Goettingen, Department of Economics.

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