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Refundability and Price: Empirical Analysis on the Airline Industry

Author

Listed:
  • Seongman Moon

    () (Universidad Carlos III de Madrid)

  • Makoto Watanabe

    () (Universidad Carlos III de Madrid)

Abstract

This paper provides new evidence on price dispersion in the US airline industry. Using the observed fare differences between refundable and non-refundable tickets, we first document evidence on the prices passengers pay for a refund option. We find that the factors related to the value of refund option and customers¡¯ individual demand uncertainty have a significant effect on the relative refund fares. This finding is robust for various market structures. Further, taking into account the variations of the relative refund fares, we investigate the effects of market structure on price dispersion.

Suggested Citation

  • Seongman Moon & Makoto Watanabe, 2011. "Refundability and Price: Empirical Analysis on the Airline Industry," Working Papers 1107, Research Institute for Market Economy, Sogang University.
  • Handle: RePEc:sgo:wpaper:1107
    as

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    File URL: ftp://163.239.156.99/wpaper/MSM_RIME_2011-07.pdf
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    References listed on IDEAS

    as
    1. Escobari, Diego & Jindapon, Paan, 2014. "Price discrimination through refund contracts in airlines," International Journal of Industrial Organization, Elsevier, vol. 34(C), pages 1-8.
    2. Marc Möller & Makoto Watanabe, 2010. "Advance Purchase Discounts Versus Clearance Sales," Economic Journal, Royal Economic Society, vol. 120(547), pages 1125-1148, September.
    3. Alberto A. Gaggero & Claudio A. Piga, 2011. "Airline Market Power and Intertemporal Price Dispersion," Journal of Industrial Economics, Wiley Blackwell, vol. 59(4), pages 552-577, December.
    4. 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.
    5. James D. Dana & Jr., 1998. "Advance-Purchase Discounts and Price Discrimination in Competitive Markets," Journal of Political Economy, University of Chicago Press, vol. 106(2), pages 395-422, April.
    6. Nocke, Volker & Peitz, Martin & Rosar, Frank, 2011. "Advance-purchase discounts as a price discrimination device," Journal of Economic Theory, Elsevier, vol. 146(1), pages 141-162, January.
    7. Courty, Pascal, 2003. "Ticket Pricing under Demand Uncertainty," Journal of Law and Economics, University of Chicago Press, vol. 46(2), pages 627-652, October.
    8. Pascal Courty & Li Hao, 2000. "Sequential Screening," Review of Economic Studies, Oxford University Press, vol. 67(4), pages 697-717.
    9. 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.
    10. 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, February.
    11. Manuel A. Hernandez & Steven N. Wiggins, 2014. "Nonlinear Pricing Strategies And Competitive Conditions In The Airline Industry," Economic Inquiry, Western Economic Association International, vol. 52(2), pages 539-561, April.
    12. 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.
    13. Dana, James D, Jr, 2001. "Monopoly Price Dispersion under Demand Uncertainty," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(3), pages 649-670, August.
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    Cited by:

    1. 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.

    More about this item

    Keywords

    Price discrimination; Refundability; Competition; Airline industry;

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L93 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Air Transportation

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