Price Discrimination Strategies of Low-cost Carriers

The low-cost carriers' (LCCs) pricing system is characterised by a single class of booking that starts with a minimum fare and then monotonically increases its value over time. This is a form of price discrimination although markets are not physically or temporally separate. Using game theory techniques, this paper shows that this Lo-Hi (low first and later high) strategy is optimal under certain ranges of fare. The paper also finds that the existence of different probabilities of consuming the good and of different willingness to pay makes it possible to separate markets in time and to profitably price discriminate. ? 2009 LSE and the University of Bath