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Price Discrimination Strategies of Low-cost Carriers

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  • Carlos F. Alves
  • Cristina Barbot

Abstract

The low-cost carriers' (LCCs) pricing system is characterised by a single class of booking that starts with a minimum fare and then monotonically increases its value over time. This is a form of price discrimination although markets are not physically or temporally separate. Using game theory techniques, this paper shows that this Lo-Hi (low first and later high) strategy is optimal under certain ranges of fare. The paper also finds that the existence of different probabilities of consuming the good and of different willingness to pay makes it possible to separate markets in time and to profitably price discriminate. ? 2009 LSE and the University of Bath

Suggested Citation

  • Carlos F. Alves & Cristina Barbot, 2009. "Price Discrimination Strategies of Low-cost Carriers," Journal of Transport Economics and Policy, University of Bath, vol. 43(3), pages 345-363, September.
  • Handle: RePEc:tpe:jtecpo:v:43:y:2009:i:3:p:345-363
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    Citations

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    Cited by:

    1. Bergantino, Angela Stefania & Capozza, Claudia, 2014. "One price for all? The role of market captivity as a price discrimination device: evidence from the Italia city-pair markets," Working Papers 14_1, SIET Società Italiana di Economia dei Trasporti e della Logistica.
    2. Angela Stefania Bergantino & Claudia Capozza, 2015. "Airline Pricing Behavior Under Limited Inter-Modal Competition," Economic Inquiry, Western Economic Association International, vol. 53(1), pages 700-713, 01.
    3. Angela Stefania Bergantino & Capozza, Claudia, 2012. "Airline Pricing Behaviour Under Limited Intermodal Competition," Working Papers 12_6, SIET Società Italiana di Economia dei Trasporti e della Logistica, revised 2012.
    4. Elwakil, Omar S. & Dresner, Martin, 2013. "Low-cost carriers and Canadian traffic generation at US border airports," Journal of Air Transport Management, Elsevier, vol. 33(C), pages 68-72.
    5. Budd, Lucy & Francis, Graham & Humphreys, Ian & Ison, Stephen, 2014. "Grounded: Characterising the market exit of European low cost airlines," Journal of Air Transport Management, Elsevier, vol. 34(C), pages 78-85.
    6. Cattaneo, Mattia & Malighetti, Paolo & Morlotti, Chiara & Redondi, Renato, 2016. "Quantity price discrimination in the air transport industry: The easyJet case," Journal of Air Transport Management, Elsevier, vol. 54(C), pages 1-8.
    7. Bergantino, Angela Stefania & Capozza, Claudia, 2014. "One price for all? The role of market captivity as a price discrimination device: evidence from the Italia city-pair markets," Working Papers 1401, SIET Società Italiana di Economia dei Trasporti e della Logistica.
    8. Bergantino, Angela Stefania & Capozza, Claudia, 2015. "One price for all? Price discrimination and market captivity: Evidence from the Italian city-pair markets," Transportation Research Part A: Policy and Practice, Elsevier, vol. 75(C), pages 231-244.
    9. Dresner, Martin & Eroglu, Cuneyt & Hofer, Christian & Mendez, Fabio & Tan, Kerry, 2015. "The impact of Gulf carrier competition on U.S. airlines," Transportation Research Part A: Policy and Practice, Elsevier, vol. 79(C), pages 31-41.

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