Price Discrimination Strategies of Low Cost Carriers

Abstract:     
Low cost carriers' (LCCs) pricing system is characterized by a single class of booking that starts with a minimum fare and then monotonically increases its value over time. This is a form of discriminating prices although markets are not physically or temporal separated. Using game theory techniques, this paper shows that this Lo-Hi (low first and later high) strategy is optimal under certain ranges of fares. The paper also finds that the existence of different probabilities of consuming the good and of different willingness to pay makes possible to separate markets in time and profitably discriminate prices.

Keywords: Pricing Strategy, Low Cost Carriers, Internet Sales, Game Theory

JEL Classification: C79, D21, D49, L93

Accepted Paper Series