Price Discrimination in International Airline Markets

TL;DR

This paper models how monopoly airlines use price discrimination across time and customer segments to improve efficiency, analyzing welfare implications and the effects of different pricing strategies using detailed airline data.

Contribution

It introduces a model of inter-temporal and intra-temporal price discrimination in airline markets and estimates it with detailed flight-level data, revealing welfare effects and inefficiencies.

Findings

Current pricing achieves 77% of first-best welfare

Private information about passenger valuations causes most inefficiency

Discriminating between business and leisure passengers can increase welfare

Abstract

We develop a model of inter-temporal and intra-temporal price discrimination by monopoly airlines to study the ability of different discriminatory pricing mechanisms to increase efficiency and the associated distributional implications. To estimate the model, we use unique data from international airline markets with flight-level variation in prices across time, cabins, and markets and information on passengers' reasons for travel and time of purchase. The current pricing practice yields approximately 77% of the first-best welfare. The source of this inefficiency arises primarily from private information about passenger valuations, not dynamic uncertainty about demand. We also find that if airlines could discriminate between business and leisure passengers, total welfare would improve at the expense of business passenger surplus. Also, replacing the current pricing that involves screening passengers across cabin classes with offering a single cabin class has minimal effect on total welfare.