Does Scarcity Drive Intra-Route Price Dispersion in Airlines?

Abstract

This paper uses unique new data to analyze within carrier-route airline price dispersion, and to investigate the economic forces that cause passengers on the same route and airline to pay substantially different fares. Our analysis begins by providing one of the first empirical analyses of the well-known price dispersion associated with ticket characteristics. We show that a relatively simple set of ticket restrictions accounts for the large majority of price dispersion on a carrier-route. This basic structure is often thought to be associated with “price discrimination”, however we do not attempt to formally test such theories directly. Rather, our primary goal is to take this basic pricing structure as given and determine how the structure of fares changes with the scarcity of seats available on a particular flight. The theoretical underpinnings of our analysis are predictions derived from the scarcity pricing theories of Dana (1999b) and Gale and Holmes (1993). These theories identify how both the expected and realized load factors drive the level and dispersion of fares, providing testable predictions about how the pricing of tickets is influenced by load factor. Our results show that scarcity only modestly affects fare levels and has virtually no effect on fare dispersion.

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