The Effect of the Internet on Pricing in the Airline Industry

Abstract

We examine the relationship between nonlinear pricing and consumer search costs in the airline industry during a period of increasing Internet use. We find that higher Internet usage increases the spread between unrestricted and restricted fares. We also find that the ratio of unrestricted to restricted ticket fares increases with more competition, but the effect is smaller as a result of a larger population searching for airline travel online, implying that the Internet is inducing more competitive firm behavior. The data support models of price discrimination through brand differentiation, but do not support standard consumer search cost models well.

Keywords: Airlines, Internet, price discrimination, consumer search