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Asymmetric Price Adjustments in Airlines

  • Escobari, Diego

This paper uses a unique daily time series data set to investigate the asymmetric response of airline prices to capacity costs driven by demand fluctuations. We use a Markov regime-switching model with time-varying transition probabilities to capture the time variation in the response. The results show strong evidence of asymmetric price adjustments: positive cost shifts have a large positive effect, while negative cost shifts have no effect. The asymmetry is also explained by summer travel, but not by the size of cost shifts. The findings show the importance of consumer heterogeneity and capacity constraints as a source of asymmetric responses.

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File URL: http://mpra.ub.uni-muenchen.de/42115/1/MPRA_paper_42115.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 42115.

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Date of creation: 21 Oct 2012
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Handle: RePEc:pra:mprapa:42115
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