Price Discrimination in International Airline Markets

Abstract

We develop a model of inter-temporal and intra-temporal price discrimination by airlines to study the impact that non-stationary stochastic demand and asymmetric information have on efficiency and the division of surplus. We use unique data from international airline markets with flight-level variation in prices across time and cabins, along with information on passengers’ reason for travel, to flexibly estimate demand with multi-dimensional preference heterogeneity. The estimates imply current pricing practices grant late-arriving business passengers substantial informational rents and yield only 79.5% of first-best welfare, with stochastic demand and asymmetric information accounting for 56% and 44% of the gap, respectively. We also discuss mechanisms airlines can use to resolve these inefficiencies.