How does COVID-19 affect intertemporal price discrimination and price dispersion? Evidence from the airline industry

Luttmann, Alexander and Gaggero, Alberto A (2023): How does COVID-19 affect intertemporal price discrimination and price dispersion? Evidence from the airline industry.

Abstract

This study provides empirical evidence documenting how COVID-19 affects intertemporal pricing and price dispersion in the U.S. domestic airline market. Studying a unique panel of 43 million fares collected before and after the outbreak of the pandemic, we find that airlines discounted fares by an average of 57% in the first five months of the pandemic relative to the five months that immediately preceded the pandemic. We also find that flight-level prices increased at a lower rate, particularly in the last week to departure. As a consequence, flight-level price dispersion decreased. These findings are consistent with the theoretical predictions arising from models of stochastic peak-load pricing and intertemporal price discrimination.

• Item Type: MPRA Paper
• Language: English
• Keywords: airlines, COVID-19, intertemporal price discrimination, price dispersion
• Subjects: D - Microeconomics > D4 - Market Structure, Pricing, and Design > D40 - General; I - Health, Education, and Welfare > I1 - Health > I19 - Other; L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L11 - Production, Pricing, and Market Structure ; Size Distribution of Firms; L - Industrial Organization > L9 - Industry Studies: Transportation and Utilities > L93 - Air Transportation

References

Alderighi, M., Gaggero, A. A., and Piga, C. A. (2015a). The effect of code-share agreements on the temporal profile of airline fares. Transportation Research Part A: Policy and Practice, 79(C):42–54.

Alderighi, M., Gaggero, A. A., and Piga, C. A. (2022). Hidden prices with fixed inventory: Evidence from the airline industry. Transportation Research Part B: Methodological, 157:42–61.

Alderighi, M., Nicolini, M., and Piga, C. A. (2015b). Combined effects of capacity and time on fares: Insights from the yield management of a low-cost airline. The Review of Economics and Statistics, 97(4):900–915.

Allen, J., Clark, R., and Houde, J.-F. (2014). Price dispersion in mortgage markets. The Journal of Industrial Economics, 62(3):377–416.

Aryal, G., Murry, C., and Williams, J. (2021). Price discrimination in international airline markets. mimeo.

Avogadro, N., Malighetti, P., Redondi, R., and Salanti, A. (2021). A tale of airline competition: When full-service carriers undercut low-cost carriers fares. Journal of Air Transport Management, 92:102027.

Barron, J. M., Taylor, B. A., and Umbeck, J. R. (2004). Number of sellers, average prices, and price dispersion. International Journal of Industrial Organization, 22(8-9):1041–1066.

Bergantino, A., Capozza, C., and Capurso, M. (2018). Pricing strategies: Who leads and who follows in the air and rail passenger markets in Italy. Applied Economics, 50:1–17.

Bergantino, A. S. and Capozza, C. (2015a). Airline pricing behavior under limited inter‐modal competition. Economic Inquiry, 53(1):700–713.

Bergantino, A. S. and Capozza, C. (2015b). One price for all? Price discrimination and market captivity: Evidence from the Italian city-pair markets. Transportation Research Part A: Policy and Practice, 75:231–244.

Bergquist, S., Otten, T., and Sarich, N. (2020). COVID-19 pandemic in the United States. Health Policy and Technology, 9(4):623–638.

Berry, S. and Jia, P. (2010). Tracing the woes: An empirical analysis of the airline industry. American Economic Journal: Microeconomics, 2(3):1–43.

Bilotkach, V., Gaggero, A. A., and Piga, C. A. (2015). Airline pricing under different market conditions: Evidence from European low-cost carriers. Tourism Management, 47:152–163.

Bilotkach, V., Gorodnichenko, Y., and Talavera, O. (2010). Are airlines’ price-setting strategies different? Journal of Air Transport Management, 16(1):1–6.

Borenstein, S. and Rose, N. L. (1994). Competition and price dispersion in the U.S. airline industry. Journal of Political Economy, 102(4):653–683.

Brueckner, J. K. and Spiller, P. T. (1994). Economies of traffic density in the deregulated airline industry. The Journal of Law and Economics, 37(2):379–415.

Burdett, K. and Judd, K. L. (1983). Equilibrium price dispersion. Econometrica: Journal of the Econometric Society, pages 955–969.

Cardebat, J.-M., Faye, B., Le Fur, E., and Storchmann, K. (2017). The law of one price? Price dispersion on the auction market for fine wine. Journal of Wine Economics, 12(3):302–331.

Chandra, A. and Tappata, M. (2011). Consumer search and dynamic price dispersion: An application to gasoline markets. The RAND Journal of Economics, 42(4):681–704.

Clay, K., Krishnan, R., and Wolff, E. (2001). Prices and price dispersion on the web: Evidence from the online book industry. The Journal of Industrial Economics, 49(4):521–539.

Cornia, M., Gerardi, K. S., and Shapiro, A. H. (2012). Price dispersion over the business cycle: Evidence from the airline industry. The Journal of Industrial Economics, 60(3):347–373.

Crew, M. A. and Kleindorfer, P. R. (1986). The economics of public utility regulation. Springer.

Cui, Y., Orhun, A. Y., and Duenyas, I. (2019). How price dispersion changes when upgrades are introduced: Theory and empirical evidence from the airline industry. Management Science, 65(8):3835–3852.

Dahlby, B. and West, D. S. (1986). Price dispersion in an automobile insurance market. Journal of Political Economy, 94(2):418–438.

Dai, M., Liu, Q., and Serfes, K. (2014). Is the effect of competition on price dispersion nonmonotonic? Evidence from the U.S. airline industry. The Review of Economics and Statistics, 96(1):161–170.

Dana, J. D. (1999). Equilibrium price dispersion under demand uncertainty: The roles of costly capacity and market structure. The RAND Journal of Economics, 30(4):632–660.

Dana, J. D. J. (2001). Monopoly price dispersion under demand uncertainty. International Economic Review, 42(3):649–670.

Davis, P. (2005). The effect of local competition on admission prices in the U.S. motion picture exhibition market. The Journal of Law & Economics, 48(2):677–707.

de Juniac, A. (2020). IATA Annual Review 2020. Technical report, International Air Transport Association (IATA). https://www.iata.org/contentassets/c81222d96c9a4e0 bb4ff6ced0126f0bb/iata-annual-review-2020.pdf.

Deltas, G. (2003). The small-sample bias of the gini coefficient: Results and implications for empirical research. The Review of Economics and Statistics, 85(1):226–234.

Escobari, D. (2009). Systematic peak-load pricing, congestion premia and demand diverting: Empirical evidence. Economics Letters, 103(1):59–61.

Escobari, D. (2012). Dynamic pricing, advance sales and aggregate demand learning in airlines. The Journal of Industrial Economics, 60(4):697–724.

Escobari, D. (2014). Estimating dynamic demand for airlines. Economics Letters, 124(1):26–29.

Escobari, D. and Jindapon, P. (2014). Price discrimination through refund contracts in airlines. International Journal of Industrial Organization, 34:1–8.

Escobari, D., Rupp, N. G., and Meskey, J. (2019). An analysis of dynamic price discrimination in airlines. Southern Economic Journal, 85(3):639–662.

Evans, W. N., Froeb, L. M., and Werden, G. J. (1993). Endogeneity in the concentration-price relationship: Causes, consequences, and cures. Journal of Industrial Economics, 41(4):431–438.

Gaggero, A. A. and Luttmann, A. (2023). The determinants of hidden-city ticketing: Competition, hub-and-spoke networks, and advance-purchase requirements. Transportation Research Part E: Logistics and Transportation Review, 173:103086.

Gaggero, A. A. and Luttmann, A. (2025). Systematic peak-load pricing during holiday periods: Evidence from the U.S. airline industry. Economics of Transportation, 41:100395.

Gaggero, A. A. and Piga, C. A. (2010). Airline competition in the British Isles. Transportation Research Part E: Logistics and Transportation Review, 46(2):270–279.

Gaggero, A. A. and Piga, C. A. (2011). Airline market power and intertemporal price dispersion. The Journal of Industrial Economics, 59(4):552–577.

Garrow, L. and Lurkin, V. (2020). How COVID-19 is impacting and reshaping the airline industry. Journal of Revenue and Pricing Management, 20:3–9.

Gayle, P. G. and Wu, C.-Y. (2013). A re-examination of incumbents’ response to the threat of entry: Evidence from the airline industry. Economics of Transportation, 2(4):119–130.

Gerardi, K. S. and Shapiro, A. H. (2009). Does competition reduce price dispersion? New evidence from the airline industry. Journal of Political Economy, 117(1):1–37.

Goldberg, P. K. and Verboven, F. (2001). The evolution of price dispersion in the european car market. The Review of Economic Studies, 68(4):811–848.

Greenfield, D. (2014). Competition and service quality: New evidence from the airline industry. Economics of Transportation, 3(1):80–89.

Hayes, K. J. and Ross, L. B. (1998). Is airline price dispersion the result of careful planning or competitive forces? Review of Industrial Organization, 13(5):523–541.

Kaplan, G., Menzio, G., Rudanko, L., and Trachter, N. (2019). Relative price dispersion: Evidence and theory. American Economic Journal: Microeconomics, 11(3):68–124.

Kim, D., Kim, M., and Tan, K. (2021). Tacit collusion and price dispersion in the presence of Southwest Airlines. Southern Economic Journal, 88(1):3–32.

Lewis, M. (2008). Price dispersion and competition with differentiated sellers. The Journal of Industrial Economics, 56(3):654–678.

Li, X., Gu, B., and Liu, H. (2013). Price dispersion and loss-leader pricing: Evidence from the online book industry. Management Science, 59(6):1290–1308.

Luttmann, A. (2019). Are passengers compensated for incurring an airport layover? Estimating the value of layover time in the U.S. airline industry. Economics of Transportation, 17:1–13.

Luttmann, A. and Gaggero, A. A. (2024). Purchase discounts on federal holidays and adjacent shopping holidays: Evidence from the airline industry. Southern Economic Journal, 91(2):465–499.

MacDonald, J. M. (2000). Demand, information, and competition: Why do food prices fall at seasonal demand peaks? The Journal of Industrial Economics, 48(1):27–45.

Mantin, B. and Koo, B. (2009). Dynamic price dispersion in airline markets. Transportation Research Part E: Logistics and Transportation Review, 45(6):1020–1029.

McAfee, R. P. (1995). Multiproduct equilibrium price dispersion. Journal of Economic Theory, 67(1):83–105.

Morlotti, C. and Redondi, R. (2023). The impact of COVID-19 on airlines’ price curves. Journal of Air Transport Management, 107:102328.

McAfee, R. P. (1995). Multiproduct equilibrium price dispersion. Journal of Economic Theory, 67(1):83–105.

Orlov, E. (2011). How does the internet influence price dispersion? Evidence from the airline industry. The Journal of Industrial Economics, 59(1):21–37.

Pennerstorfer, D., Schmidt-Dengler, P., Schutz, N., Weiss, C., and Yontcheva, B. (2020). Information and price dispersion: Theory and evidence. International Economic Review, 61(2):871–899.

Reinganum, J. F. (1979). A simple model of equilibrium price dispersion. Journal of Political Economy, 87(4):851–858.

Salop, S. (1977). The noisy monopolist: Imperfect information, price dispersion and price discrimination. The Review of Economic Studies, 44(3):393–406.

Salop, S. and Stiglitz, J. (1977). Bargains and ripoffs: A model of monopolistically competitive price dispersion. The Review of Economic Studies, 44(3):493–510.

Salop, S. and Stiglitz, J. E. (1982). The theory of sales: A simple model of equilibrium price dispersion with identical agents. The American Economic Review, 72(5):1121–1130.

Sengupta, A. and Wiggins, S. N. (2014). Airline pricing, price dispersion, and ticket characteristics on and off the internet. American Economic Journal: Economic Policy, 6(1):272–307.

Shepard, A. (1991). Price discrimination and retail configuration. Journal of Political Economy, 99(1):30–53.

Sorensen, A. T. (2000). Equilibrium price dispersion in retail markets for prescription drugs. Journal of Political Economy, 108(4):833–850.

Studdert, D. M., Hall, M. A., and Mello, M. M. (2020). Partitioning the curve — interstate travel restrictions during the Covid-19 pandemic. New England Journal of Medicine, 383(13):e83.

Swain, R. B. o. X. L. and Wallentin, F. Y. (2024). COVID-19 pandemic waves: Identification and interpretation of global data. Heliyon, 10(3):e25090.

Van Nieuwerburgh, S. and Weill, P.-O. (2010). Why has house price dispersion gone up? The Review of Economic Studies, 77(4):1567–1606.

Whalen, W. T. (2007). A panel data analysis of code-sharing, antitrust immunity, and open skies treaties in international aviation markets. Review of Industrial Organization, 30(1):39–61.

WTTC (2021). Adapting to Endemic Covid-19: The Outlook For Business Travel. Technical report, World Travel & Tourism Council (WTTC). https://wttc.org/Portals/0/Documents/Reports/2021/WTTC\%20Adapting\%20to\%20Endemic\%20Covid\%20-\%20Business\%20Travel\%20Outlook\%20011121.pdf?ver=2021-11-02-082813-280.