Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/70624
Authors: 
Cornia, Marco
Gerardi, Kristopher S.
Shapiro, Adam Hale
Year of Publication: 
2011
Series/Report no.: 
Working Paper, Federal Reserve Bank of Atlanta 2011-3
Abstract: 
A parsimonious theoretical model of second degree price discrimination suggests that the business cycle will affect the degree to which firms are able to price-discriminate between different consumer types. We analyze price dispersion in the airline industry to assess how price discrimination can expose airlines to aggregate-demand fluctuations. Performing a panel analysis on seventeen years of data covering two business cycles, we find that price dispersion is highly procyclical. Estimates show that a rise in the output gap of 1 percentage point is associated with a 1.9 percent increase in the interquartile range of the price distribution in a market. These results suggest that markups move procyclically in the airline industry, such that during booms in the cycle, firms can significantly raise the markup charged to those with a high willingness to pay. The analysis suggests that this impact on firms' ability to price-discriminate results in additional profit risk, over and above the risk that comes from variations in cost.
Subjects: 
airlines
price discrimination
price dispersion
markup
business cycle
JEL: 
D4
L9
L1
E3
Document Type: 
Working Paper

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