Nonlinear Pricing Strategies and Market Concentration in the Airline Industry

This dissertation investigates the effect of market concentration on nonlinearpricing strategies in the airline industry. The study develops a theoretical nonlinearpricing model with both discrete product and consumer types to derive testable implications about the impact of market concentration on the structure of relative priceswithin a menu of prices. The analysis then uses a unique, airline ticket level dataset to test the model predictions. The data set consists of a representative sampleof airline tickets purchased between June and December 2004 from one major Computer Reservation System (CRS), for travel in the fourth quarter of the same year.The study restricts attention to 246 domestic routes in the United States, resultingin 878,169 tickets. This unique data set allows us to examine the effect of marketstructure conditions on relative prices within a menu of fare types with restrictiveticket characteristics. The analysis also contributes to the understanding of how thelevel of competition in a market affects the dispersion of airline prices.The results indicate that market concentration differentially impacts high versuslow priced fares, as predicted by the theoretical model. More specifically, there is adecrease in the ratio of high- to low-quality fares as markets become more concentrated, after controlling for numerous factors that may affect prices through costs andmarket characteristics. The ratio of medium- to low-quality fares, however, increaseswith less competition. From a welfare perspective, it is interesting to observe that notall travelers are affected in the same way by a decrease in the level of competition. Business travelers, who purchase high priced fares, end up paying relatively lowerprices in more concentrated markets while leisure travelers pay more.