Price Discrimination through Refund Contracts in Airlines

Escobari, Diego and Jindapon, Paan (2014): Price Discrimination through Refund Contracts in Airlines. Forthcoming in: International Journal of Industrial Organization

Abstract

This paper shows how an airline monopoly uses refundable and non-refundable tickets to screen consumers who are uncertain about their travel. Our theoretical model predicts that the difference between these two fares diminishes as individual demand uncertainty is resolved. Using an original data set from U.S. airline markets, we find strong evidence supporting our model. Price discrimination opportunities through refund contracts decline as the departure date nears and individuals learn about their demand.

• Item Type: MPRA Paper
• Language: English
• Keywords: Price discrimination; Refund contracts; Airlines; Individual demand learning
• Subjects: C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C23 - Panel Data Models ; Spatio-temporal Models; D - Microeconomics > D4 - Market Structure, Pricing, and Design > D42 - Monopoly; D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information ; Mechanism Design; L - Industrial Organization > L9 - Industry Studies: Transportation and Utilities > L93 - Air Transportation

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