Dynamic Oligopoly Pricing: Evidence from the Airline Industry

We explore how pricing dynamics in the European airline industry vary with competition and document patterns that are consistent with intertemporal price discrimination. First, the rate at which prices increase over time decreases in competition, supporting the idea that competition restrains the ability of airlines to price-discriminate against late-arriving customers. Second, the sensitivity to competition increases in the heterogeneity of the customer base, reflecting that restraints on price discrimination are only relevant when there is initial scope for discrimination. The patterns explain 83 percent of the observed within-flight price dispersion and 17 percent of the cross-market variation in pricing dynamics.