Taking Account

BEA economist looks at sumers essentially separate tion strategies at an airline, the airline price strategies themselves through the ticket authors developed a simple the-The role of pricing strategies, choices that they make. This oretical model of second-degree which can have a profound im­ type of self selection is referred price discrimination and applied pact on companies' profitability, to in the economic literature as it to a relatively long panel data has attracted plentiful interest second-degree price discrimina­ set of airline ticket prices that from economists recently. Add­ tion. spanned almost two full busi­ ing to the literature, Adam H. During business cycle booms, ness cycles. Shapiro, an economist at the Bu­ airlines can more easily price Price discrimination in any reau of Economic Analysis discriminate among their con-empirical analysis tends to be (BEA), Marco Cornia of Johns sumers, while in business down-difficult to identify and measure. Hopkins University, and Kristo­ turns, such pricing is much The authors did not have access pher S. Gerardi of the Federal more difficult. This results in to data with enough informa-Reserve Bank of Atlanta have procyclical markups and thus tion about consumer and airline taken a look at price discrimina­ procyclical airlines profits. In-ticket characteristics to identify tion and its role in the airline in­ deed, airlines that rely more precise instances of price dis­ dustry. heavily on price discrimination crimination and to directly Their paper, " Price Discrimi­ strategies, according to the study how price discrimination nation and Business-Cycle Risk, " study, should expect more vola-evolved over time. Instead, they presents evidence that suggests tile profits over business cycles. adopted the strategy of the pre-price discrimination by airlines Given the large number of vious literature and used price is highly procyclical and that the bankruptcies in this industry, dispersion at the airline-route use of such pricing strategies has there is reason to believe that level as a proxy for price dis-had a profound impact on the airlines are particularly sensitive crimination. entire airline industry. to movements in the business In particular, they looked at Price discrimination is a well-cycle. However, while several of how various measures of price known strategy that airlines and the traditional, legacy airlines dispersion are correlated with other companies employ to try were forced to seek bankruptcy the business cycle, while control-to increase profits. It involves court protection in recent years, ling for the variation in price charging …