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Third-degree Price Discrimination in the Presence of Congestion Externality

Author

Listed:
  • Achim I. Czerny

    (VU University Amsterdam, the Netherlands)

  • Anming Zhang

    (The University of British Columbia, Canada)

Abstract

This paper analyzes third-degree price discrimination of a monopoly airline in the presence of congestion externality when all markets are served. The model features the business-passenger and leisure-passenger markets where business passengers exhibit a higher time valuation, and a less price-elastic demand, than leisure passengers. Our main result is the identification of the time-valuation effect of price discrimination, which can work in the opposite direction as the well-known output effect on welfare. This time-valuation effect clearly explains why discriminating prices can improve welfare even when this is associated with a reduction in aggregate output.

Suggested Citation

  • Achim I. Czerny & Anming Zhang, 2014. "Third-degree Price Discrimination in the Presence of Congestion Externality," Tinbergen Institute Discussion Papers 14-140/VIII, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:20140140
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    File URL: https://papers.tinbergen.nl/14140.pdf
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    References listed on IDEAS

    as
    1. Niskanen, Esko, 1987. "Congestion tolls and consumer welfare," Transportation Research Part B: Methodological, Elsevier, vol. 21(2), pages 171-174, April.
    2. repec:bla:jindec:v:46:y:1998:i:4:p:511-24 is not listed on IDEAS
    3. W. Leontief, 1940. "The Theory of Limited and Unlimited Discrimination," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 54(3), pages 490-501.
    4. Stephen K. Layson, 1998. "Third‐Degree Price Discrimination With Interdependent Demands," Journal of Industrial Economics, Wiley Blackwell, vol. 46(4), pages 511-524, December.
    5. Nahata, Babu & Ostaszewski, Krzysztof & Sahoo, P K, 1990. "Direction of Price Changes in Third-Degree Price Discrimination," American Economic Review, American Economic Association, vol. 80(5), pages 1254-1258, December.
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    Citations

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    Cited by:

    1. Czerny, Achim I. & Zhang, Anming, 2014. "Airport congestion pricing when airlines price discriminate," Transportation Research Part B: Methodological, Elsevier, vol. 65(C), pages 77-89.
    2. Czerny, Achim I. & Zhang, Anming, 2015. "How to mix per-flight and per-passenger based airport charges," Transportation Research Part A: Policy and Practice, Elsevier, vol. 71(C), pages 77-95.
    3. Adriaan Hendrik van der Weijde, 2014. "Price Differentiation and Discrimination in Transport Networks," Tinbergen Institute Discussion Papers 14-099/VIII, Tinbergen Institute.
    4. Achim I. Czerny & Vincent A.C. van den Berg & Erik T. Verhoef, 2015. "Complementary Alliances with Endogenous Fleets and Load Factors," Tinbergen Institute Discussion Papers 15-134/VIII, Tinbergen Institute.

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    More about this item

    Keywords

    Price discrimination; congestion; time valuation; monopoly; airline;
    All these keywords.

    JEL classification:

    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • L93 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Air Transportation

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