Download this Paper Open PDF in Browser

Testing Theories of Scarcity Pricing in the Airline Industry

51 Pages Posted: 8 Dec 2009  

Steven L. Puller

Texas A&M University - Department of Economics; National Bureau of Economic Research (NBER)

Anirban Sengupta

Analysis Group, Inc.

Steven N. Wiggins

Texas A&M University

Date Written: December 2009

Abstract

This paper investigates why passengers pay substantially different fares for travel on the same airline between the same two airports. We investigate questions that are fundamentally different from those in the existing literature on airline price dispersion. We use a unique new dataset to test between two broad classes of theories regarding airline pricing. The first group of theories, as advanced by Dana (1999b) and Gale and Holmes (1993), postulates that airlines practice scarcity based pricing and predicts that variation in ticket prices is driven by differences between high demand and low demand periods. The second group of theories is that airlines practice price discrimination by using ticketing restrictions to segment customers by willingness to pay. We use a unique dataset, a census of ticket transactions from one of the major computer reservation systems, to study the relationships between fares, ticket characteristics, and flight load factors. The central advantage of our dataset is that it contains variables not previously available that permit a test of these theories. We find only mixed support for the scarcity pricing theories. Flights during high demand periods have slightly higher fares but exhibit no more fare dispersion than flights where demand is low. Moreover, the fraction of discounted advance purchase seats is only slightly higher on off-peak flights. However, ticket characteristics that are associated with second-degree price discrimination drive much of the variation in ticket pricing.

Suggested Citation

Puller, Steven L. and Sengupta, Anirban and Wiggins, Steven N., Testing Theories of Scarcity Pricing in the Airline Industry (December 2009). NBER Working Paper No. w15555. Available at SSRN: https://ssrn.com/abstract=1518748

Steven Puller (Contact Author)

Texas A&M University - Department of Economics ( email )

5201 University Blvd.
College Station, TX 77843-4228
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Anirban Sengupta

Analysis Group, Inc. ( email )

111 Huntington Avenue
10th floor
Boston, MA 02199
United States

Steven N. Wiggins

Texas A&M University ( email )

Langford Building A
798 Ross St.
College Station, TX 77843-3137
United States

Paper statistics

Downloads
32
Abstract Views
380