PRICE DISCRIMINATION, MERGER POLICY, AND THE COMPETITIVE CONSTRAINT OF LOW-VALUE CUSTOMERS IN AIRLINE MARKETS

Abstract

I explore the implications of oligopoly price discrimination for merger analysis and policy in the context of the passenger air travel market. I test a theoretical model of airline pricing on a database of prices offered by Australian and New Zealand carriers at the time two of these were applying to, in effect, merge. The results are that (1) no significant restriction of total output is required for the exercise of market power, and (2) competition with a low-cost carrier for the low willingness-to-pay leisure traveler market exerts little discipline on the pricing of airfares for infra-marginal customers.