This paper shows how an airline monopoly uses refundable and non-refundable tickets to screen consumers who are uncertain about their travel. Our theoretical model predicts that the difference between these two fares diminishes as individual demand uncertainty is resolved. Using an original data set from U.S. airline markets, we find strong evidence supporting our model. Price discrimination opportunities through refund contracts decline as the departure date nears and individuals learn about their demand.
• We show how an airline screens consumers who are uncertain about their travel.
• The theory explains how an airline sets refundable and non-refundable prices.
• The difference between the two fares declines as consumers learn about their travel.
• We use an original airlines data set to find strong evidence supporting the theory.
• Price discrimination decreases as departure date approaches.
Escobari, Diego, and Paan Jindapon. "Price discrimination through refund contracts in airlines." International Journal of Industrial Organization 34 (2014): 1-8. https://doi.org/10.1016/j.ijindorg.2014.02.005
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International Journal of Industrial Organization