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Price discrimination through refund contracts in airlines

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  • Escobari, Diego
  • Jindapon, Paan

Abstract

This paper shows how an airline monopoly uses refundable and non-refundable tickets to screen consumers who are uncertain about their travel. Our theoretical model predicts that the difference between these two fares diminishes as individual demand uncertainty is resolved. Using an original data set from U.S. airline markets, we find strong evidence supporting our model. Price discrimination opportunities through refund contracts decline as the departure date nears and individuals learn about their demand.

Suggested Citation

  • Escobari, Diego & Jindapon, Paan, 2014. "Price discrimination through refund contracts in airlines," International Journal of Industrial Organization, Elsevier, vol. 34(C), pages 1-8.
  • Handle: RePEc:eee:indorg:v:34:y:2014:i:c:p:1-8
    DOI: 10.1016/j.ijindorg.2014.02.005
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    Cited by:

    1. Alderighi, Marco & Cento, Alessandro & Piga, Claudio A., 2011. "A case study of pricing strategies in European airline markets: The London – Amsterdam route," Journal of Air Transport Management, Elsevier, vol. 17(6), pages 369-373.
    2. Escobari, Diego & Rupp, Nicholas & Meskey, Joseph, 2018. "Dynamic Price Discrimination in Airlines," MPRA Paper 88078, University Library of Munich, Germany.
    3. Escobari, Diego, 2014. "Estimating dynamic demand for airlines," Economics Letters, Elsevier, vol. 124(1), pages 26-29.
    4. Diego Escobari & Nicholas G. Rupp & Joseph Meskey, 2019. "An Analysis of Dynamic Price Discrimination in Airlines," Southern Economic Journal, John Wiley & Sons, vol. 85(3), pages 639-662, January.
    5. Toomas Hinnosaar & Keiichi Kawai, 2020. "Robust pricing with refunds," RAND Journal of Economics, RAND Corporation, vol. 51(4), pages 1014-1036, December.
    6. He, Qingxin & Zheng, Xiaoyong, 2020. "Price discrimination across different ticket distribution channels: Evidence from the US-china flight market," China Economic Review, Elsevier, vol. 61(C).
    7. Hugh Sibly, 2017. "Product Quality With Heterogeneous Consumers and Linear Pricing," Australian Economic Papers, Wiley Blackwell, vol. 56(4), pages 328-351, December.
    8. Seongman Moon & Makoto Watanabe, 2011. "Refundability and Price: Empirical Analysis on the Airline Industry," Working Papers 1107, Research Institute for Market Economy, Sogang University.
    9. Luttmann, Alexander & Gaggero, Alberto A, 2020. "Purchase discounts and travel premiums during holiday periods: Evidence from the airline industry," MPRA Paper 104863, University Library of Munich, Germany.
    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. Akan, Mustafa & Ata, Barış & Dana, James D., 2015. "Revenue management by sequential screening," Journal of Economic Theory, Elsevier, vol. 159(PB), pages 728-774.
    12. Moreno, Luis & Ramon, Ana & Pedreño, Andrés, 2015. "The Development of Low-cost Airlines and Tourism as a Competitiveness Complementor: Effects, Evolution and Strategies," Journal of Spatial and Organizational Dynamics, Cinturs - Research Centre for Tourism, Sustainability and Well-being, University of Algarve, vol. 3(4), pages 262-274.
    13. Bilotkach, Volodymyr & Gorodnichenko, Yuriy & Talavera, Oleksandr, 2012. "Sensitivity of prices to demand shocks: A natural experiment in the San Francisco Bay Area," Transportation Research Part A: Policy and Practice, Elsevier, vol. 46(7), pages 1137-1151.
    14. 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.
    15. 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.
    16. Nicola Lacetera & Claudio A. Piga & Lorenzo Zirulia, 2021. "Sticky Price for Declining Risk? The Case of Cancellation Premia in the Hotel Industry," NBER Working Papers 28456, National Bureau of Economic Research, Inc.
    17. 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.
    18. Tuo Wang & Michael Y. Hu, 2019. "Differential pricing with consumers’ valuation uncertainty by a monopoly," Journal of Revenue and Pricing Management, Palgrave Macmillan, vol. 18(3), pages 247-255, June.

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    More about this item

    Keywords

    Price discrimination; Refund contracts; Airlines; Individual demand learning;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L93 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Air Transportation

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