Dynamic Price Discrimination in Airlines

Prices for the same flight change substantially depending on the time of purchase. Labeling this time-variation as discriminatory is misleading because the cost of an unsold airline seat changes with inventory, days before departure and aggregate demand expectations. This paper uses a unique dataset with round-the-clock posted fares to identify a dynamic price discrimination component. Consistent with agents forming expectations of future prices, we find higher prices during office hours (when business travelers are likely to buy tickets) and lower prices in the evening (when leisure travelers are more likely to purchase). As the proportion of business travelers increases closer to departure, both price dispersion and price discrimination become larger. We also find that price discrimination is more pronounced for low cost carriers than for legacy carriers.