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Second-Degree Price Discrimination and Inter-Group Effects in Airline Routes between European Cities

Tinbergen Institute Discussion Paper 11-118/3

42 Pages Posted: 11 Aug 2011  

Marco Alderighi

Università della Valle d'Aosta; Bocconi University

Alessandro Cento

KLM-Royal Dutch Airlines - Revenue Management Department

Peter Nijkamp

VU University of Amsterdam - Department of Spatial Economics; Tinbergen Institute - Tinbergen Institute Amsterdam (TIA)

Piet Rietveld

VU University Amsterdam - Department of Spatial Economics (Deceased)

Date Written: August 11, 2011

Abstract

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.

Keywords: passenger aviation market, airlines routes, second-degree price discrimination, pricing behavior

JEL Classification: L1, L93, D4

Suggested Citation

Alderighi, Marco and Cento, Alessandro and Nijkamp, Peter and Rietveld , Piet, Second-Degree Price Discrimination and Inter-Group Effects in Airline Routes between European Cities (August 11, 2011). Tinbergen Institute Discussion Paper 11-118/3. Available at SSRN: https://ssrn.com/abstract=1908113 or http://dx.doi.org/10.2139/ssrn.1908113

Marco Alderighi (Contact Author)

Università della Valle d'Aosta ( email )

Strada dei Cappuccini 2/A
Aosta, 11100
Italy

Bocconi University ( email )

Via Sarfatti 25
20136 Milan, MI 20136
Italy

Alessandro Cento

KLM-Royal Dutch Airlines - Revenue Management Department ( email )

Antwoordnummer 747
1110 VG Schiphol Airport
Netherlands

Peter Nijkamp

VU University of Amsterdam - Department of Spatial Economics ( email )

De Boelelaan 1105
1081HV Amsterdam
Netherlands
+31 20 4446091 (Phone)
+31 20 4445611 (Fax)

Tinbergen Institute - Tinbergen Institute Amsterdam (TIA)

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

Piet Rietveld

VU University Amsterdam - Department of Spatial Economics (Deceased)

De Boelelaan 1105
1081HV Amsterdam
Netherlands
+31 20 4446097 (Phone)
+31 20 4446004 (Fax)

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