Third-degree price discrimination in the presence of congestion externality

Achim I. Czerny and Anming Zhang

Canadian Journal of Economics, 2015, vol. 48, issue 4, 1430-1455

Abstract: This paper analyzes third-degree price discrimination of a monopoly airline in the presence of congestion externality when all markets are served. The model features the business-passenger and leisure-passenger markets where business passengers exhibit a higher time valuation, and a less price-elastic demand, than leisure passengers. Our main result is the identification of the time-valuation effect of price discrimination, which can work in the opposite direction as the well-known output effect on welfare. This time-valuation effect clearly explains why discriminating prices can improve welfare even when this is associated with a reduction in aggregate output.

JEL-codes: D42 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (13)

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