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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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    References listed on IDEAS

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    Cited by:

    1. Yuriy Gorodnichenko & Oleksandr Talavera, 2017. "Price Setting in Online Markets: Basic Facts, International Comparisons, and Cross-Border Integration," American Economic Review, American Economic Association, vol. 107(1), pages 249-282, January.
    2. repec:eee:touman:v:54:y:2016:i:c:p:502-512 is not listed on IDEAS
    3. Agostini, Claudio A. & Inostroza, Diego & Willington, Manuel, 2015. "Price effects of airlines frequent flyer programs: The case of the dominant firm in Chile," Transportation Research Part A: Policy and Practice, Elsevier, vol. 78(C), pages 283-297.
    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," Quaderni di Dipartimento 171, University of Pavia, Department of Economics and Quantitative Methods.
    5. repec:eee:touman:v:47:y:2015:i:c:p:152-163 is not listed on IDEAS
    6. G. de Jong & C.L. Behrens & H. van Herk & E.T. Verhoef, 2017. "Domestic Market Power in the International Airline Industry," Tinbergen Institute Discussion Papers 17-009/VIII, Tinbergen Institute, revised 20 Mar 2018.
    7. repec:eee:transa:v:103:y:2017:i:c:p:198-210 is not listed on IDEAS
    8. Tomasz Stanisław Szopiński & Robert Nowacki, 2014. "Plane Ticket Price Dispersion in the Online Selling System in Poland," Contemporary Economics, University of Finance and Management in Warsaw, vol. 8(2), June.
    9. 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.
    10. 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.
    11. Melis, Giuseppe & Piga, Claudio A, 2016. "Are all online hotel prices created dynamic? An empirical assessment," MPRA Paper 75896, University Library of Munich, Germany.
    12. 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.
    13. Alderighi, Marco & Gaggero, Alberto A & Piga, Claudio A, 2016. "The hidden side of dynamic pricing in airline markets," MPRA Paper 71674, University Library of Munich, Germany.
    14. repec:eee:touman:v:55:y:2016:i:c:p:123-132 is not listed on IDEAS
    15. 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.
    16. 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.
    17. Catherine Muller-Vibes & Chantal Roucolle & Miguel Urdanoz, 2018. "Dynamic Price Competition in the Air Transport Market: An Analysis on Long-Haul Routes," Post-Print hal-01822988, HAL.

    More about this item

    Keywords

    Law of One Price; Online pricing; Dispersion; Airlines; Search costs;

    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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