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Price discrimination in the airline market: the effect of market concentration


  • Joanna Stavins


Economic theory suggests that a monopolist can price discriminate more successfully than can a perfectly competitive firm. Most real-life markets, however, fall somewhere in between the two extremes. What happens as the market becomes more competitive: Does price discrimination increase or decrease? This paper examines how price discrimination changes with market concentration in the airline market. The paper uses data on prices and ticket restrictions across various routes within the United States, controlling for distances and airport gate restrictions. Price discrimination is found to increase as the markets become more competitive.

Suggested Citation

  • Joanna Stavins, 1996. "Price discrimination in the airline market: the effect of market concentration," Working Papers 96-7, Federal Reserve Bank of Boston.
  • Handle: RePEc:fip:fedbwp:96-7

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    References listed on IDEAS

    1. David R. Graham & Daniel P. Kaplan & David S. Sibley, 1983. "Efficiency and Competition in the Airline Industry," Bell Journal of Economics, The RAND Corporation, vol. 14(1), pages 118-138, Spring.
    2. Morrison, Steven A & Winston, Clifford, 1990. "The Dynamics of Airline Pricing and Competition," American Economic Review, American Economic Association, vol. 80(2), pages 389-393, May.
    3. Borenstein, Severin & Rose, Nancy L, 1994. "Competition and Price Dispersion in the U.S. Airline Industry," Journal of Political Economy, University of Chicago Press, vol. 102(4), pages 653-683, August.
    4. Brueckner, Jan K & Spiller, Pablo T, 1994. "Economies of Traffic Density in the Deregulated Airline Industry," Journal of Law and Economics, University of Chicago Press, vol. 37(2), pages 379-415, October.
    5. Gale, I., 1992. "Price Dispersion in a Market with Advance Purchases," Working papers 9214, Wisconsin Madison - Social Systems.
    6. Holmes, Thomas J, 1989. "The Effects of Third-Degree Price Discrimination in Oligopoly," American Economic Review, American Economic Association, vol. 79(1), pages 244-250, March.
    7. Gale, Ian L & Holmes, Thomas J, 1993. "Advance-Purchase Discounts and Monopoly Allocation of Capacity," American Economic Review, American Economic Association, vol. 83(1), pages 135-146, March.
    8. Hurdle, Gloria J, et al, 1989. "Concentration, Potential Entry, and Performance in the Airline Industry," Journal of Industrial Economics, Wiley Blackwell, vol. 38(2), pages 119-139, December.
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    Cited by:

    1. Diego Escobari & Sang-Yeob Lee, 2012. "Demand shifting across flights and airports in a spatial competition model," Letters in Spatial and Resource Sciences, Springer, vol. 5(3), pages 175-183, October.
    2. Marc Möller & Makoto Watanabe, 2016. "Competition in the presence of individual demand uncertainty," RAND Journal of Economics, RAND Corporation, vol. 47(2), pages 273-292, May.
    3. Escañuela Romana, Ignacio, 2018. "La elasticidad precio de la demanda de transporte aéreo de pasajeros en los Estados Unidos
      [The price elasticity of demand for air travel in the United States]
      ," MPRA Paper 83572, University Library of Munich, Germany.
    4. Justin P. Johnson & David P. Myatt, 2003. "Multiproduct Quality Competition: Fighting Brands and Product Line Pruning," American Economic Review, American Economic Association, vol. 93(3), pages 748-774, June.
    5. Diego Escobari, 2013. "Asymmetric Price Adjustments in Airlines," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 34(2), pages 74-85, March.
    6. 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.
    7. Diego Escobari, 2012. "Dynamic Pricing, Advance Sales and Aggregate Demand Learning in Airlines," Journal of Industrial Economics, Wiley Blackwell, vol. 60(4), pages 697-724, December.
    8. Diego Escobari & Li Gan, 2007. "Price Dispersion under Costly Capacity and Demand Uncertainty," NBER Working Papers 13075, National Bureau of Economic Research, Inc.
    9. Kristopher S. Gerardi & Adam Hale Shapiro, 2007. "The effects of competition on price dispersion in the airline industry: a panel analysis," Working Papers 07-7, Federal Reserve Bank of Boston.
    10. Stacey, Brian, 2015. "Airline Price Discrimination," MPRA Paper 69168, University Library of Munich, Germany.

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