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Low-cost airlines and online price dispersion

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  • Bachis, Enrico
  • Piga, Claudio A.

Abstract

This paper presents a new form of online pricing tactic where airlines post, at the same time and for the same flight, fares in different currencies that violate the Law of One Price. Unexpectedly for an online market, price dispersion may be accompanied by a hidden discount that tends to persist in the period preceding a flight's departure. The econometric analysis reveals that airlines post dispersive fares in less competitive routes with more heterogeneous demand. Furthermore, temporal persistence of intra-firm fare dispersion suggests that it is an equilibrium phenomenon engendered by the airlines' need to manage stochastic demand conditions for a specific flight.

Suggested Citation

  • Bachis, Enrico & Piga, Claudio A., 2011. "Low-cost airlines and online price dispersion," International Journal of Industrial Organization, Elsevier, vol. 29(6), pages 655-667.
    • Handle: RePEc:eee:indorg:v:29:y:2011:i:6:p:655-667
    DOI: 10.1016/j.ijindorg.2011.02.006
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    5. 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.
    6. Ivaldi, Marc & Petrova, Milena & Urdanoz, Miguel, 2022. "Airline cooperation effects on airfare distribution: An auction-model-based approach," Transport Policy, Elsevier, vol. 115(C), pages 239-250.
    7. Bilotkach, Volodymyr & Gaggero, Alberto A. & Piga, Claudio A., 2015. "Airline pricing under different market conditions: Evidence from European Low-Cost Carriers," Tourism Management, Elsevier, vol. 47(C), pages 152-163.
    8. Gerben de Jong & Christiaan Behrens & Hester van Herk & Erik Verhoef, 2019. "Domestic Market Power in the International Airline Industry," Transportation Science, INFORMS, vol. 53(3), pages 796-810, May.
    9. Escobari, Diego, 2017. "Airport, airline and departure time choice and substitution patterns: An empirical analysis," Transportation Research Part A: Policy and Practice, Elsevier, vol. 103(C), pages 198-210.
    10. Tomasz Stanisław Szopiński & Robert Nowacki, 2014. "Plane Ticket Price Dispersion in the Online Selling System in Poland," Contemporary Economics, University of Economics and Human Sciences in Warsaw., vol. 8(2), June.
    11. Varella, Rafael R. & Frazão, Jessica & Oliveira, Alessandro V.M., 2017. "Dynamic pricing and market segmentation responses to low-cost carrier entry," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 98(C), pages 151-170.
    12. Diego Escobari & Manuel A. Hernandez, 2019. "Separating Between Unobserved Consumer Types: Evidence From Airlines," Economic Inquiry, Western Economic Association International, vol. 57(2), pages 1215-1230, April.
    13. Chantal Roucolle & Catherine Müller & Miguel Urdanoz, 2015. "Dynamic price competition in air transport market, An analysis on long-haul routes," Post-Print hal-01409798, HAL.
    14. Melis, Giuseppe & Piga, Claudio A, 2016. "Are all online hotel prices created dynamic? An empirical assessment," MPRA Paper 75896, University Library of Munich, Germany.
    15. Domínguez-Menchero, J. Santos & Rivera, Javier & Torres-Manzanera, Emilio, 2014. "Optimal purchase timing in the airline market," Journal of Air Transport Management, Elsevier, vol. 40(C), pages 137-143.
    16. Alderighi, Marco & Gaggero, Alberto A. & Piga, Claudio A., 2022. "Hidden prices with fixed inventory: Evidence from the airline industry," Transportation Research Part B: Methodological, Elsevier, vol. 157(C), pages 42-61.
    17. Abrate, Graziano & Viglia, Giampaolo, 2016. "Strategic and tactical price decisions in hotel revenue management," Tourism Management, Elsevier, vol. 55(C), pages 123-132.
    18. Xulia González & Daniel Miles-Touya, 2018. "Price dispersion, chain heterogeneity, and search in online grocery markets," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 9(1), pages 115-139, March.
    19. Moreno-Izquierdo, L. & Ramón-Rodríguez, A. & Perles Ribes, J., 2015. "The impact of the internet on the pricing strategies of the European low cost airlines," European Journal of Operational Research, Elsevier, vol. 246(2), pages 651-660.
    20. Chiambaretto, Paul & Combe, Emmanuel, 2023. "Business model hybridization but heterogeneous economic performance: Insights from low-cost and legacy carriers in Europe," Transport Policy, Elsevier, vol. 136(C), pages 83-97.
    21. Moreno-Izquierdo, Luis & Egorova, Galina & Peretó-Rovira, Alexandre & Más-Ferrando , Adrián, 2018. "Exploring the use of artificial intelligence in price maximisation in the tourism sector: its application in the case of Airbnb in the Valencian Community," INVESTIGACIONES REGIONALES - Journal of REGIONAL RESEARCH, Asociación Española de Ciencia Regional, issue 42, pages 113-128.
    22. Tomasz Stanisław Szopiński & Robert Nowacki, 2015. "The Influence of Purchase Date and Flight Duration over the Dispersion of Airline Ticket Prices," Contemporary Economics, University of Economics and Human Sciences in Warsaw., vol. 9(3), September.

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    More about this item

    Keywords

    Law of One Price; Online pricing; Dispersion; Airlines; Search costs;
    All these keywords.

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L93 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Air Transportation

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