Second-Degree Price Discrimination and Price Dispersion: The Case of the U.S. Airline Industry

Abstract:     
This paper introduces a second-degree oligopolistic price discrimination model with consumer heterogeneity both on a horizontal and a vertical dimension. We find a non-monotonic relationship between market power and price dispersion. Using data from the U.S. airline industry, we find supportive empirical evidence for the theoretical prediction. To the extent that price dispersion is correlated with the degree of price discrimination, our exercise indicates that the relationship between market power and price discrimination can be nonmonotonic.

Keywords: Price dispersion, Second-Degree Price Discrimination, Non-Linear Pricing, Airline Industry

JEL Classifications: D43, L11, L93

Working Paper Series