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Consumer Heterogeneity and Markups over the Business Cycle: Evidence from the Airline Industry

Author

Listed:
  • Marco Cornia
  • Kristopher S. Gerardi
  • Adam Hale Shapiro

    (Bureau of Economic Analysis)

Abstract

We analyze price dispersion in the airline industry in order to determine the effects of the business cycle on markup variations. We find that the cycle can affect the degree to which airlines can price discriminate between different consumer types, ultimately affecting the degree of price dispersion. Performing a fixed-effects panel analysis on 17 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 one percentage point increases the interquartile range by 1.6 percent. These results suggest that markups move procyclically in the airline industry, such that during booms in the cycle, the firm can significantly raise the markup charged to those with high willingness to pay. Our analysis suggests that this impact on the firm’s ability to price discriminate imposes extra profit risk to the firm over and above cost variations.

Suggested Citation

  • Marco Cornia & Kristopher S. Gerardi & Adam Hale Shapiro, 2010. "Consumer Heterogeneity and Markups over the Business Cycle: Evidence from the Airline Industry," BEA Working Papers 0056, Bureau of Economic Analysis.
    • Handle: RePEc:bea:wpaper:0056
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    References listed on IDEAS

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    JEL classification:

    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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