Second-Degree Price Discrimination and Inter-Group Effects in Airline Routes between European Cities
Università della Valle d'Aosta; Bocconi University
KLM-Royal Dutch Airlines - Revenue Management Department
VU University of Amsterdam - Department of Spatial Economics; Tinbergen Institute - Tinbergen Institute Amsterdam (TIA)
VU University Amsterdam - Department of Spatial Economics (deceased)
August 11, 2011
Tinbergen Institute Discussion Paper 11-118/3
This paper presents a model of second-degree price discrimination and inter-group effects to describe the full-service pricing behavior in the passenger aviation market. Consumer heterogeneity is assumed on both a horizontal and a vertical dimension, while various distinct market structures, some of which include low-cost carriers (LCCs), are considered. In the theoretical model framework, we derive that the rivalry between full-service carriers (FSCs) reduces fare differences between the business and leisure segments. Furthermore, the presence of LCCs increases fare gaps between leisure and business travelers, and it also induces FSCs to decrease fares in the leisure segment and eventually to increase them in the business one. This last outcome emerges from a change in passenger arrangements caused by inter-group effects. In our empirical analysis, we use data on published airfares of Lufthansa, British Airways, KLM and Alitalia for the main city-pairs from Italy to Germany, the UK and the Netherlands. Our results show that the empirical results provide support for our theoretical propositions.
Number of Pages in PDF File: 42
Keywords: passenger aviation market, airlines routes, second-degree price discrimination, pricing behavior
JEL Classification: L1, L93, D4
Date posted: August 11, 2011
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