Friday, September 3, 2010

Can price discrimination survive competition?

Nice article by two economists from the Boston Fed shows that when Midway Air (green dots) and later Southwest Air (chartreuse dots) entered the Philly<-->Chicago route, United Airlines price dispersion collapsed. Mostly the highest fares came down to close to the lowest.  This is consistent with the theory that price discrimination cannot survive in a competitive market. Curiously, ATA entry (blue dots) had a much smaller effect on United prices than Midway or Southwest entry.

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