This paper analyzes third-degree price discrimination of a monopoly airline in the presence of congestion externality when all markets are served. The model features the business-passenger and leisure-passenger markets where business passengers exhibit a higher time valuation, and a less price-elastic demand, than leisure passengers. Our main result is the identification of the time-valuation effect of price discrimination, which can work in the opposite direction as the well-known output effect on welfare. This time-valuation effect clearly explains why discriminating prices can improve welfare even when this is associated with a reduction in aggregate output.
# 14-140/VIII (2014-10-23)
- Achim I. Czerny, VU University Amsterdam, the Netherlands; Anming Zhang, The University of British Columbia, Canada
- Price discrimination, congestion, time valuation, monopoly, airline
- JEL codes:
- D42, L93