Price Discrimination and Focal Points for Tacit Collusion: Evidence from the Airline Industry

Abstract

We use unique data sets with round-the-clock posted fares and a regression-discontinuity design to identify price discrimination in advance-purchase discounts. Price discrimination increases fares by 14% between two and one week before departure, and by 7.6% between three and two weeks to departure. While competition reduces price discrimination, it is unaffected by product variety for a multiproduct monopolist. The results show that the arbitrary thresholds of 7 and 14 days-in-advance serve as focal points for tacit collusion and to implement price discrimination in competitive markets. For round-trip tickets discrimination depends on the days-in-advance of both the outbound and inbound flights.