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Price discrimination and business-cycle risk

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  • Marco Cornia
  • Kristopher S. Gerardi
  • Adam Hale Shapiro

Abstract

A parsimonious theoretical model of second degree price discrimination suggests that the business cycle will affect the degree to which firms are able to price-discriminate between different consumer types. We analyze price dispersion in the airline industry to assess how price discrimination can expose airlines to aggregate-demand fluctuations. Performing a panel analysis on seventeen years of data covering two business cycles, we find that price dispersion is highly procyclical. Estimates show that a rise in the output gap of 1 percentage point is associated with a 1.9 percent increase in the interquartile range of the price distribution in a market. These results suggest that markups move procyclically in the airline industry, such that during booms in the cycle, firms can significantly raise the markup charged to those with a high willingness to pay. The analysis suggests that this impact on firms' ability to price-discriminate results in additional profit risk, over and above the risk that comes from variations in cost.

Suggested Citation

  • Marco Cornia & Kristopher S. Gerardi & Adam Hale Shapiro, 2011. "Price discrimination and business-cycle risk," FRB Atlanta Working Paper 2011-03, Federal Reserve Bank of Atlanta.
  • Handle: RePEc:fip:fedawp:2011-03
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    File URL: http://www.frbatlanta.org/documents/pubs/wp/wp1103.pdf
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    Cited by:

    1. Cantor Vargas, Natalia & Herrera Saavedra, Juan Pablo & Campo Robledo, Jacobo & Lis-Gutiérrez, Jenny-Paola, 2013. "Una propuesta metodológica de discriminación de segundo grado: el caso de tarifas multiclase para el registro marcario en Colombia durante el año 2012
      [A methodological proposal for second-degree p
      ," MPRA Paper 46271, University Library of Munich, Germany.
    2. Juan Pablo Herrera Saavedra & Natalia Cantor Vargas & Jenny Paola Lis Gutiérrez & Jacobo Alberto Campo Robledo, 2014. "Discriminación de precios de segundo grado: el caso de tarifas multi-clase para el registro marcario en Colombia," REVISTA FACULTAD DE CIENCIAS ECONÓMICAS, UNIVERSIDAD MILITAR NUEVA GRANADA, vol. 0(1), pages 63-78, June.

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