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Essays on Price Discrimination and Congestion Externalities in the U.S. Airline Industry

  • Author(s): Luttmann, Alexander Phillip
  • Advisor(s): Brueckner, Jan K
  • et al.
Abstract

This dissertation contains three chapters and focuses on price discrimination and airport congestion in the U.S. airline industry.

The first chapter explores possible determinants that may affect an airline's decision to charge passengers different roundtrip fares depending on trip origin, a case of directional price discrimination. Such fare differences cannot be the result of differences in cost, as the cost of flying a roundtrip passenger does not significantly differ depending on direction. It is argued that directional fare differences result from airlines recognizing that passenger price elasticities differ between route endpoints. A price discriminating airline will then charge a higher roundtrip fare at the endpoint where the passenger price elasticity of demand is comparatively lower. Evidence is found suggesting that airlines do use differences in income to price discriminate when setting roundtrip fares. Fares are found to be $0.18-$0.43 higher on average for each $1000 difference in average per capita income between origin and destination metro areas. This finding is sensible assuming that higher incomes reduce the price elasticity of demand for air travel, with richer passengers being less sensitive to the cost of travel.

The second chapter investigates the trade-off between providing convenient flight connections for passengers and reducing airport congestion. From the passenger perspective, layovers are detrimental since the addition to total travel time relative to a nonstop itinerary is a cost incurred by the passenger. An airline is able to reduce a passenger's layover time by narrowing the gap between flights at the connecting airport. However, narrowing this flight gap has the adverse effect of increasing airport congestion. Taking these perspectives into account, it is clear that layover time influences a prospective passenger's purchasing decision and an airline's flight scheduling decision. Using published fare and itinerary data from Google Flights, this chapter provides insight into both decisions by providing empirical estimates on the value of layover time in the U.S. airline industry. Passengers are found to be compensated with a fare that is $42.74-$47.60 cheaper per hour of layover time.

The last chapter evaluates the effectiveness of slot controls (restrictions on the number of departing and arriving flights) as a congestion management policy. Utilizing the introduction of slot controls at John F. Kennedy (JFK) and Newark (EWR) airports in 2008 as a quasi-experiment, no evidence is found of a reduction in flight delays at both airports. In the months after slot controls were introduced, the average arrival delay at EWR actually increased by 7 minutes. Further, the length of Delta's departure banks (high-volume periods of departing flights) decreased by about 2 minutes at JFK while the scheduled time of EWR flights decreased by 1.5-2.2 minutes. These findings are consistent with Ater (2012), who suggested that policies aimed at reducing congestion at highly concentrated airports will only have a limited impact because dominant airlines already internalize congestion. The results highlight the need for policymakers to carefully consider how the allocation of airport slots will impact flight scheduling decisions when implementing similar policies in the future.

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