Evidence of directional price discrimination in the U.S. airline industry

Alexander Luttmann

International Journal of Industrial Organization, 2019, vol. 62, issue C, 291-329

Abstract: This paper explores possible determinants that may affect an airline’s decision to charge passengers different roundtrip fares depending on trip origin, a case of directional price discrimination. Such fare differences cannot be the result of differences in cost, as the cost of flying a roundtrip passenger does not significantly differ depending on direction. It is argued that directional fare differences result from airlines recognizing that passenger price elasticities differ between route endpoints. A price discriminating airline will then charge a higher roundtrip fare at the endpoint where the passenger price elasticity of demand is comparatively lower. Evidence is found suggesting that airlines do use differences in income to price discriminate when setting roundtrip fares. Fares are found to be $0.18-$0.43 higher on average for each $1000 difference in average per capita income between origin and destination metro areas. This finding is sensible assuming that higher incomes reduce the price elasticity of demand for air travel, with richer passengers being less sensitive to the cost of travel.

Keywords: Airlines; Competition; Price discrimination; Yield management (search for similar items in EconPapers)
JEL-codes: L11 L13 L93 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:indorg:v:62:y:2019:i:c:p:291-329

DOI: 10.1016/j.ijindorg.2018.03.013

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