Price Discrimination and Focal Points for Tacit Collusion: Evidence from the Airline Industry
42 Pages Posted: 28 Jul 2016 Last revised: 24 Mar 2017
Date Written: January 10, 7
We use unique data sets with round-the-clock posted fares and a regression discontinuity design to identify price discrimination in advance-purchase discounts. Price discrimination increases fares by 14% between two and one week before departure, and by 7.6% between three and two weeks to departure. While competition reduces price discrimination, it is unaffected by product variety for a multiproduct monopolist. The results show that the arbitrary thresholds of 7 and 14 days-in-advance serve as focal points for tacit collusion and to implement price discrimination in competitive markets. For round-trip tickets price discrimination depends on the days-in-advance for both the outbound and inbound flights.
Keywords: Price discrimination, Market structure, Focal points, Multiproduct monopolist, Advance purchases, Regression discontinuity, Airlines
JEL Classification: C23, L93, R41
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