NONLINEAR PRICING STRATEGIES AND COMPETITIVE CONDITIONS IN THE AIRLINE INDUSTRY

Manuel A. Hernandez · Steven N. Wiggins

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

Abstract

This paper empirically examines the effect of competitive conditions on nonlinear pricing strategies in the airline industry. We use a unique data set to analyze the impact of concentration and the competitive pressures generated by Southwest and other low cost carriers on the relative prices within a menu of fares. The menu orders tickets by quality based upon cabin and ticket restrictions. We analyze the ratio of fares charged for various qualities within the menu to the fares charged for the lowest quality nonrefundable, restricted tickets. We observe a fare compression for only the highest fares on only the most concentrated (i.e., monopoly) routes. This result is something of a puzzle given a monopolist's market power. We find, however, that actual and potential competition from Southwest reduces low end fares and generally leads to substantial fare compression throughout the fare menu. (JEL L11, L93)

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1989Hubs and High Fares: Dominance and Market Power in the U.S. Airline Industry 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 2002Nonlinear Pricing with Random Participation 1998Advance‐Purchase Discounts and Price Discrimination in Competitive Markets 2001Actual, Adjacent, and Potential Competition Estimating the Full Effect of Southwest Airlines 2007Chapter 34 Price Discrimination and Competition

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