Testing Theories of Scarcity Pricing in the Airline Industry

Steven L. Puller · Anirban Sengupta · Steven N. Wiggins

34 citations0/0 files storedNational Bureau of Economic Research

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Aviation Industry Analysis and Trends Merger and Competition Analysis Consumer Market Behavior and Pricing

Abstract

This paper investigates why passengers pay substantially different fares for travel on the same airline between the same two airports.We investigate questions that are fundamentally different from those in the existing literature on airline price dispersion.We use a unique new dataset to test between two broad classes of theories regarding airline pricing.The first group of theories, as advanced by Dana (1999b) and Gale and Holmes (1993), postulates that airlines practice scarcity based pricing and predicts that variation in ticket prices is driven by differences between high demand and low demand periods.The second group of theories is that airlines practice price discrimination by using ticketing restrictions to segment customers by willingness to pay.We use a unique dataset, a census of ticket transactions from one of the major computer reservation systems, to study the relationships between fares, ticket characteristics, and flight load factors.The central advantage of our dataset is that it contains variables not previously available that permit a test of these theories.We find only mixed support for the scarcity pricing theories.Flights during high demand periods have slightly higher fares but exhibit no more fare dispersion than flights where demand is low.Moreover, the fraction of discounted advance purchase seats is only slightly higher on off-peak flights.However, ticket characteristics that are associated with second-degree price discrimination drive much of the variation in ticket pricing.

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References

1989Hubs and High Fares: Dominance and Market Power in the U.S. Airline Industry 1989Oligopolistic Pricing with Sequential Consumer Search 1994Competition and Price Dispersion in the U.S. Airline Industry 2008How do Incumbents Respond to the Threat of Entry? Evidence from the Major Airlines *2009Does Competition Reduce Price Dispersion? New Evidence from the Airline Industry 1998Advance‐Purchase Discounts and Price Discrimination in Competitive Markets 1980A Model in which an Increase in the Number of Sellers Leads to a Higher Price 2001Price Discrimination in the Airline Market: The Effect of Market Concentration

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2012Price Dispersion Over the Business Cycle: Evidence from the Airline Industry 2012Capacity-contingent pricing and competition in the airline industry 2009Fare dispersions in airline markets: A quantitative assessment of theoretical explanations 2012Combined Effects of Load Factors and Booking Time on Fares: Insights from the Yield Management of a Low-Cost Airline 2010Pricing Dynamics in the Australian Airline Market*

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