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Airline Pricing under Different Market Conditions: Evidence from European Low-Cost Carriers

  • Volodymyr Bilotkach

    (University of California, Irvine)

  • Alberto A. Gaggero

    ()

    (University of Pavia)

  • Claudio A. Piga

    (Loughborough University; RCEA)

Traditional theories of airline pricing maintain that fares monotonically increase as fewer seats remain available on a flight. A fortiori, this implies a monotonically increasing temporal profile of fares. In this paper, we exploit the presence of drops in offered fares over time as an indicator of an active yield management intervention by two main European Low-Cost Carriers observed daily during the period June 2002 - June 2003. Our results indicate that yield management is effective in raising a flight's load factor. Furthermore, yield management interventions are more intense, and generate a stronger impact, on more competitive routes: one possible interpretation is that a reduction in competitive pressure allows the carriers to adopt a more standardized approach to pricing. Similarly, we find that yield management interventions are more effective in raising the load factor on routes where the customer mix is more heterogenous (i.e., it includes passengers traveling for leisure, business and for family matters). On markets with homogeneous customer base, no robust yield management effect was observed.

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Paper provided by The Rimini Centre for Economic Analysis in its series Working Paper Series with number 47_11.

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Date of creation: Nov 2011
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Handle: RePEc:rim:rimwps:47_11
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  1. Eden, Benjamin, 1990. "Marginal Cost Pricing When Spot Markets Are Complete," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1293-1306, December.
  2. Alberto A. Gaggero & Claudio A. Piga, 2009. "Airline Market Power and Intertemporal Price Dispersion," Discussion Paper Series 2009_10, Department of Economics, Loughborough University, revised Jul 2009.
  3. Diego Escobari & Li Gan, 2007. "Price Dispersion under Costly Capacity and Demand Uncertainty," NBER Working Papers 13075, National Bureau of Economic Research, Inc.
  4. Kristopher S. Gerardi & Adam Hale Shapiro, 2009. "Does Competition Reduce Price Dispersion? New Evidence from the Airline Industry," Journal of Political Economy, University of Chicago Press, vol. 117(1), pages 1-37, 02.
  5. Marc Möller & Makoto Watanabe, 2010. "Advance Purchase Discounts Versus Clearance Sales," Economic Journal, Royal Economic Society, vol. 120(547), pages 1125-1148, 09.
  6. Steven L. Puller & Anirban Sengupta & Steven N. Wiggins, 2009. "Testing Theories of Scarcity Pricing in the Airline Industry," NBER Working Papers 15555, National Bureau of Economic Research, Inc.
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