On-line International Price Discrimination with and without Arbitrage conditions

Transcription

1 On-lin Intrnational Pric Discrimination with and without Arbitrag conditions Enrico Bachis Nottingham Univrsity Businss School Claudio A. Piga* Economics Dpartmnt, Loughborough Univrsity Jun 2006 Abstract W prsnt vidnc of a form of on-lin pric discrimination whr airlins charg, at th sam tim and for th sam flight, fars xprssd in diffrnt currncis that violat th law of On Pric. Unxpctdly for an on-lin markt, w find that pric discrimination may b accompanid by arbitrag opportunitis and that both tnd to prsist for long priods bfor a flight s dpartur. Discrimination sms to b drivn by comptitiv prssur, although som airlins practic it in routs whr thy hav a monopoly position. Finally, discrimination is mor likly within two wks prior to dpartur, suggsting it is usd to manag stochastic dmand. JEL classification: L11, L13, L93 Kywords: Law of On Pric; sampl slction; on-lin pricing; disprsion; airlins, xchang rat. *Contact Author. Addrss for corrspondnc: Economics Dpartmnt, Loughborough Univrsity, Licstrshir,, LE11 3TU, Tl: +44 (0) ; Fax: (+44)-(0) Piga gratfully acknowldgs rcipt of th British Acadmy Largr Rsarch Grant LRG

2 Rcnt mpirical rsarch on lctronic commrc has consistntly found vidnc of pric disprsion across on-lin rtailrs, but has not rportd any cas whr th sam - company ngags in pric discrimination on-lin s Glnn Ellison and Sara F. Ellison (2005) for a survy. Th pric transparncy of th Intrnt, du its low sarch costs, is implicitly assumd not to b conduciv to ffctiv pric discrimination (hncforth, PD) bcaus th shopprs of a company stting a low and a high pric for th sam product (.g., in two diffrnt parts of its wbsit) would vry quickly larn to buy only at th low pric. To ovrcom this difficulty and xtract surplus from thir customrs, on-lin rtailrs may ngag in obfuscation stratgis by proposing add-ons to th product originally sought (Glnn Ellison and Sara F. Ellison, 2004). This is not th cas in this papr, whr w prsnt vidnc of diffrnt prics bing postd by th sam -sllr on th sam wbsit at th sam tim for xactly th sam product. Our data ar takn from th wbsits of six Europan Low Cost Airlins (hraftr, LCCs) and prtain to both domstic flights and flights conncting th with th main continntal Europan countris. A simpl xampl illustrats th natur of th PD tactic mployd by th LCCs in our sampl. Considr a flight from London to Madrid. Normally, this corrsponds to th first lg of a round trip by a British travllr, and to th rturn lg of a Spanish travllr who has just visitd th. Th location of th first lg dtrmins th currncy usd by th LCCs to show th final fars, so th Spanish travllr will b offrd a far in Euro whil th British on in Strling. If th booking occurs at th sam tim, and in th absnc of PD, th ratio of th two fars should b vry clos to th prvailing xchang rat and th Law of On Pric should hold (Pinlopi K. Goldbrg and Michal Knttr, 1997). Howvr, about 23% of th almost two million obsrvations in our datast rport a diffrnc btwn th two fars of at last 7 British Strling or mor. Thus, our LCCs ngag in PD in thir own wbsit, without rsorting to any of th obfuscation stratgis aimd at confusing th customr. What nabls thm to do so is simply that th two prics do not appar simultanously on th sam scrnshot, and on-lin customrs hav to b abl to activly ngag thmslvs in a sarch for bttr fars, th fasibility of which thy might not b awar of. In addition to prsnting a nw way to conduct PD on-lin, w show thrfor that sarch costs play an important rol vn in th on-lin markt for air tickts in Europ. 1 Th abov typ of PD is innovativ with rspct to th traditional mods of discrimination associatd with airlins, which oftn apply such tickt rstrictions as Saturday night stay-ovr rquirmnts, advanc-purchas discounts or surchargs for on-way tickts 1 Sarch ngins,.g. or ar prsnt but thy ar not capabl of dtcting th typ of PD stratgy w considr. 2

3 (Joanna Stavins, 2001; Stphani Giaum and Sarah Guillou, 2004). Indd, a fatur of Europan LCCs is to hav liminatd compltly such rstrictions:.g., dparting on a Monday and rturning on a Thursday is likly to cost lss than rturning on a Sunday. In any cas, ach lg is pricd indpndntly and th sam pric would b shown on-lin for th Monday flight if on trid to book a on-way tickt. Morovr, all LCCs offr no-frills flights with no class distinction for sats, thus xcluding any form of discrimination basd on quality (Michal Mussa and Shrwin Rosn, 1978). Finally, pric variations du to th inclusion of conncting flights ar ruld out by th fact that LCCs issu only point to point tickts (Eric Clmons t al., 2002). W discuss how on-lin PD may or may not b associatd with arbitrag opportunitis. Whn it is not, th airlins manag to sgmnt th markts prfctly. Howvr, for som of th airlins, about 8% of th obsrvations offr th chanc to sav at last 14 Strling via on-lin arbitrag. This is surprising bcaus, firstly, arbitrag is assumd to prvnt discrimination (Jan Tirol, 1988). Scondly, on would hardly xpct profitabl arbitrag opportunitis to b postd systmatically on-lin. Mor strikingly, w find strong mpirical vidnc of prsistnc ovr tim bing a charactristic of discriminatory cass and of arbitrag opportunitis, which may rmain postd for two or mor wks. Marcus Asplund and Richard Fribrg (2001) documnt how th xploitation of arbitrag opportunitis, arising in cass of dviations from th Law of On Pric, likly ld to a chang in th way prics wr listd in Scandinavian Duty-Fr shops. This dos not sm to hav happnd for at last som of our LCCs. W complmnt our data st covring th priod Jun Jun 2004 with scrn shots, rtrivd as lat as April 2006, showing xampls of PD cass. W infr that at last on larg low-cost carrir has bn activly pursuing on-lin PD stratgis for many yars vn if thy ntaild offring arbitrag opportunitis. W cannot howvr ascrtain whthr LCCs offr discriminatory prics and possibl arbitrag opportunitis bcaus ths ar hardly found out or bcaus th airlins ar not worrid if arbitrag is xrcisd. 2 In support to th last hypothsis th conomtric analysis rports that th probability to obsrv a cas with arbitrag conditions rducs as a rout bcoms mor concntratd, thus suggsting that discounts via arbitrag may b a stratgic wapon mor likly usd in comptitiv routs. Disprsion in airlin prics may aris from variations in costs of srving diffrnt passngrs or from discriminatory pricing (Svrin Bornstin and Nancy L. Ros, 1994). An important aspct in our study is that th rsarch dsign limits th rlvanc of th formr 2 It is possibl that th airlins may tolrat arbitrag only to a crtain xtnt, and programm thir sits accordingly. 3

4 sourc of disprsion, as th two prics in diffrnt currncis wr rtrivd on-lin within on hour from ach othr and ar for a sat on th sam flight (idntifid by a cod). Thus, th disprsion in our data is, at ach point in tim, th rsult of PD only. Dpnding on th sampl composition, th conomtric analysis rvals that most LCCs post discriminatory fars in lss concntratd routs, thus confirming th findings in Bornstin and Ros (1994) of disprsion incrasing with comptition. But for on airlin, which is rnownd for choosing smallr and scondary dstination airports, th opposit rsult holds, thus suggsting th prsnc of monopoly-typ forms of PD. Whn controlling for markt (i.., city-pairs) charactristics, w find siz and th prsnc of chartr comptition to b positivly associatd with disprsion, a furthr indication of PD bing drivn by comptitiv prssur. Som motivating xampls, thir rlatd thortical framwork and th data collction stratgy ar dfind in th nxt Sction, whil Sction II draws a paralll btwn th dviations from th Law of On Pric in Asplund and Fribrg (2001) and thos in our datast. Sction III idntifis diffrnt typs of discriminatory cass by distinguishing whthr thy prsnt arbitrag opportunitis. Such distinctions ar furthr invstigatd in th conomtric analysis of Sction IV, and followd by th concluding rmarks of Sction V. 1. Looking for Pric Discrimination on-lin. A. Motivating xampls. Exampls from a LCCs s wb sit, xhibiting th typ of on-lin PD on which w focus, ar shown in Figurs 1 to 4. Ths ar mad up of two parts: th top on shows th fars in British Strling (hraftr, GBP) for ach lg of a flight dparting from th and arriving in anothr Europan dstination; th bottom part rports th fars (in th currncy of th country from which th flight originats) for th invrtd trip, whr th outgoing flight is schduld on th sam day of th rturn flight in th top part. Th sam flight apparing in both parts is framd in an oval for as of comparison. Various faturs of th quris rsults nd to b spcifid. First, th quris rportd in th two parts of Figurs 1-4 wr mad only a fw minuts aftr th othr, thrfor ruling out any bias arising from changs in prics du to changs in capacity availability. 3 Scond, it is important to strss that th Europan LCCs w survyd st prics for ach lg indpndntly and that ths fars do not chang whn a customr books a round-trip or a on-way tickt. E.g., in Figur 1 th pric of GBP for th Ancona (AOI) - London Stanstd flight on July 17 th 2005 would hav appard idntically vn if th qury had not bn for a rturn flight. Third, 3 S th Windows bar at th bottom of ach part. 4

5 th programm issuing th quris yilds fars xprssd in th currncy of th country whr th first flight originats. Finally, to mak thir sits look familiar by apparing in th visitor s languag th airlins wb sits automatically dtct th nation in which th visitor is locatd. Howvr, w bliv that doing so dos not affct th lvl of fars displayd. Indd, w trid to accss th sits using diffrnt languags, but th sam fars wr rturnd. Morovr, th hypothsis that ach airlin xtracts th fars from th sam datast (or algorithm) is rinforcd by th fact that for most airlins th qury rsults ar displayd on th sam wb pag, rgardlss of th languag usd. 4 Figur 1 rports th normal cas whr th ratio of th far in Strling ( GBP) and in Euro ( R) for th flight codd FR 125 from Ancona to Stanstd on July 17 th 2005 is vry clos to th xchang rat on th dat of th qury, mad on July 9 th No attmpt at pric discriminating is highlightd in this xampl and possibl diffrncs btwn th fars ar likly to b inducd by th diffrncs in th xchang rats usd by us and by th airlin. Figur 2 capturs th natur of th PD s stratgy. It clarly shows how th pric in GBP for th flight codd FR2359 is highr than that in Euro. Considr a British travllr wishing to fly from Stanstd to Dinard on Aug 25 th 2005 and rturn on Spt 1 st. In thory this prson, instad of booking a round-trip tickt and pay GBP for th first lg plus 9.99 GBP for th scond, could buy two on-way tickts and pay only 0.45 R for th rturn. Howvr, th bnfit of such a form of arbitrag (about 9.5 GBP in this particular cas) has to b wighd against th xtra costs it would gnrat. Indd, booking two sparat tickts ntails having: 1) to pay an xtra crdit card commission of about 4.5 GBP; 2) to print an xtra tickt; 3) to fill in an xtra on-lin booking form; 4) to incur sarch costs to vrify th prsnc of arbitrag possibilitis; 5) to find out th xchang rat usd by th crdit card providr. Th prsnc of ths costs crats a band of inaction within which it is not worth pursuing arbitrag conditions (Asplund and Fribrg, 2001). This notwithstanding, Figur 2, and th following xampls, highlights an important diffrnc with prvious litratur mphasizing how an airlin s dominanc of at last on ndpoint of a rout lads to markt powr (Svrin Bornstin, 1989 and 1991). Indd, th Europan LCCs in our sampl do not practic any of th markting stratgis indicatd as th sourc of airport dominanc (i.., Frqunt Flyr Programm, Travl Agnts Commissions Ovrrid programm tc). Furthrmor, th abov- 4 At th tim of this draft (Jun 2006), Ryan Air and EasyJt allow th languag to b slctd by th visitor. Ryan Air and Bmibaby display th rsults in th sam pag rgardlss of th languag slctd - and rspctivly - whil Easyjt s fars ar shown on a URL that is languag-snsitiv. 5

6 mntiond invarianc of fars whn booking a round-trip or two on-way tickts implicitly impds th possibility to tak advantag of airport dominanc. 5 Figur 3 illustrats a cas of PD, which is not associatd with th possibility to ngag in arbitrag. Not how th pric in GBP for th flight codd FR 195 from Bologna Forli to Stanstd is about 33 GBP chapr than th far quotd in Euro. 6 Howvr, no arbitrag conditions aris in this cas bcaus a British travllr would prfr to buy a rturn tickt and not two sparat ons. A sid ffct of this is that Italian travllrs ar advrsly discriminatd as thy ar offrd a highr far for th sam typ of tickt. Th discussion on th xampls in Figur 2 and 3 highlights how arbitrag may occur only: 1) if its bnfits outwigh th sum of actual and psychological costs ngndring th band of inaction; and 2) for th rturn lg of a two-way trip. A cas satisfying both conditions is rportd in Figur 4 for th flight codd FR 373 from Biarritz to Stanstd, whr th diffrnc btwn th two fars is about 19 GBP, a valu abov th thrshold limit of 14 GBP that in th rmaindr of th papr w considr as th uppr bound of th band of inaction. Although w find ampl vidnc of similar cass in our fars datast, it is notworthy how th possibility of arbitrag dos not ncssarily translat into its actual implmntation. For instanc, in this cas as a British travllr should hav issud two quris, on for ach singl lg. Whil this would tak only littl xtra tim to prform, most individuals would naturally issu a normal qury for a rturn tickt and it is unlikly that vn a vry xprt wb-surfr could contmplat th possibility to control for arbitrag opportunitis. Psychological inrtia may thus b on rason why LCCs ngag in PD vn whn arbitrag opportunitis ar prsnt. This issu is furthr invstigatd blow. B. Data Collction Sinc th start of this rsarch projct in May 2002, fars wr collctd using an lctronic spidr, which connctd dirctly to th wbsits of only th main LCCs (i.., Ryanair, Buzz, Easyjt, GoFly) oprating in Grat Britain at th tim. Th datast includs daily flights information from Jun 2002 up to, and including, Jun 2004, for a total of 25 months. Ovr such a priod, a numbr of important vnts took plac, which ar rflctd in th datast. First, a sris of takovrs occurrd: Easyjt acquird GoFly 5 Assum that airlin 1 dominats airport A, and airlin 2 airport B. Both airlins oprat a srvic on th rout. In th traditional cas whr airlins impos a pnalty for on-way tickts, airlin 1 could charg mor for round-trip tickts originating in A, and airlin 2 would do th sam for round-trips originating in B. Absnt th pnalty and all ls qual, arbitrag would significantly rod th airlins markt powr. 6 Intrstingly, th far in Euro for th othr flight (codd FR 199) availabl on th sam rout and day is slightly chapr, although it falls wll within th band of inaction. 6

7 (Dcmbr 2002) and Ryan Air took ovr Buzz (March 2003) s Enrico Bachis and Claudio Piga (2006) for a furthr discussion. Scond, nw LCCs bgan thir oprations: th spidr was upgradd to rtriv fars from th Bmibaby and MyTravlLit sits. In ordr to account for th varity of fars offrd by airlins at diffrnt tims prior to dpartur, vry day w instructd th spidr to collct th fars for dparturs du, rspctivly, 1, 4, 7, 10, 14, 21, 28, 35, 42, 49, 56, 63 and 70 days from th dat of th qury. Hncforth, ths will b rfrrd to as booking days. So, for instanc, if w considr London Stanstd-Rom Ciampino as th rout of intrst, and assum th qury for th flights opratd by a givn airlin was carrid out on April 1 st 2003, th spidr would rtriv th prics for both th London Stanstd-Rom Ciampino and th Rom Ciampino-London Stanstd routs for dparturs on 2/4/2003, 5/4/2003, 8/4/2003, 11/4/2003 and so on (s Appndix A). Th rturn flight for both typs of dirctional journy was schduld on wk aftr th dpartur. For thos routs whr an airlin oprats mor than on flight pr day, all fars for vry flight wr collctd. Thus, for vry daily flight w managd to obtain up to 13 prics that diffr by th tim intrval from th day of dpartur. Th main rason to do so was to satisfy th nd to idntify th volution of fars - from mor than two months prior to dpartur to th day bfor dpartur which has bn notd to b vry variabl for th cas of LCCs (Eric Pls and Pit Ritvld, 2004; Stphani Giaum and Sarah Guillou, 2004). 7 Th collction of th airfars has bn carrid out vryday at th sam tim: in addition to airfars w collctd th nam of th company, th tim and dat of th qury, th dpartur dat, th schduld dpartur and arrival tim, th origin and dstination airports and th flight idntification cod. In addition to domstic routs, flights to dstinations in continntal Europan countris wr considrd (s Tabl 3). To complmnt th pric data with markt structur charactristics, scondary data on th traffic for all th routs and all th airlins flying to th countris indicatd abov was obtaind from th Civil Aviation Authority (hncforth, CAA). 8 For ach combination of company, rout and dpartur priod (i.., month/yar), th CAA providd th numbr of monthly sats, th numbr of monthly passngrs and th monthly load factors. Tabl 1 illustrats how th data rtrivd from th Intrnt rprsnt an accurat sampl of th activity of ach of th LCCs in th markts w considr. It compars th numbr of routs for which w hav pric data with th actual total numbr of routs by ach airlin. Th lattr figur is takn from th CAA datast, which also provids th numbr of routs whr our 7 Whil th spidr could hav rtrivd any numbr of prics, in practic th nd to rduc both th numbr of quris mad to an airlin srvr and th tim of programm xcution to a managabl lvl, ld to th dsign abov. 8 S 7

8 LCCs fac comptition by ithr a major FSC or anothr LCC. To tst th spidr s functionality, initially w limitd th numbr of survyd routs. Indd, in August 2002 th prcntag of routs with prics was 63% (37 ovr 59) of th total numbr opratd by Ryan Air, 50% for Easyjt, 64% for Buzz and 46% for GoFly. Howvr, thanks to th spd of th programm, within a fw months such prcntags could b incrasd significantly for all th airlins, to covr 80% or mor of th total routs thy opratd. Considring that th spidr took all th prics for all th daily flights, th pric datast provids an xhaustiv illustration of th on-lin pricing activity of ach airlin. Tabl 1 also shows that th airlins diffr in th amount of comptition thy fac. For instanc, in about 25% of EasyJt s routs at last anothr comptitor (FSC or LCC) is also prsnt. At th othr xtrm, Ryan Air (and Buzz to a lssr xtnt) facd comptition in a vry limitd subst of routs. Th othr airlins li somwhr in btwn, with comptitiv routs accounting for about 33% of th total. Such diffrncs may b drivn by th choic of th arrival dstinations. Ryan Air and Buzz chos almost xclusivly scondary airports that may b many mils away from th city of arrival, whil th othr airlins also fly to major airports whr FSC also land. C. Idntifying Pric discrimination on-lin Th data collction abov was carrid out sparatly (but simultanously) for th routs originating in and for thos originating outsid th. 9 Th first procdur cratd a datast with fars dnominatd in GBP, th scond on with fars xprssd in th currncy of th originating country. Ths two datasts wr thn matchd using a cod combining th valus of airlin, dpartur airport, arrival airport, flight cod, day of dpartur and booking day. Such a matching stratgy nabls th comparison of th on-lin fars for th sam flight availabl on th sam booking day to two travllrs, on trying to book th first lg of th trip, th othr booking th scond lg. Appndix A provids mor insights into th matching procdur. It was impossibl to guarant that th two fars wr collctd at xactly th sam tim. Thus, nw tickt purchass occurring btwn th collctions of th two fars may b rsponsibl for th fars diffrnc. This potntial problm was tackld in two ways. Th spidr was run ovrnight, thrby minimising th possibility of intrvning purchass. 9 For th domstic routs, in th scond cas w simply invrtd th dirction of th trip. 8

9 Furthr, th spidr savd th xact tim in which ach far was rtrivd: th sampl analysd in this study includs only pairs of fars collctd within a on-hour intrval Dviations from th Law of On Pric. Th abov xampls configur a situation vry similar to th on dscribd by Marcus Asplund and Richard Fribrg (2001), whr customrs of Scandinavian duty-fr stors could pay th sam itm choosing a catalogu nominal pric xprssd ithr in Swdish kronor (SEK) or in Finnish markka (FIM). Significant dviations from th Law of On Pric (LOP) aros bcaus nominal prics wr fixd until a nw catalogu was printd, whil th xchang rat btwn SEK and FIM was fr to fluctuat. Dviations wr thus mostly du to th prsnc of high fixd mnu costs which ld th companis to issu a nw catalogu only whn arbitrag conditions had bcom particularly conspicuous and costly. Figurs 2 to 4 show cass of dviations from th LOP dspit mnu costs bing ngligibl in lctronic commrc, which bgs th qustion of whthr th airlins systmatically ngag in PD. W try to answr this by dtcting th prsnc of dviations from th LOP, which, givn our data collction stratgy, can only b causd by PD. Lt f b a flight offrd by LCCs i, on rout r, with dpartur schduld on dat t, cod flight c and whos fars ar postd b days bfor t. Rout r is dfind as an airport pair. Th airlins post two prics, which can b xprssd in th sam currncy for domstic flights, or in two diffrnt currncis dpnding on th country whr th flight originats. Th following analysis holds for both domstic and intrnational flights. Lt P idntify th pric for flight f whn offrd in a continntal Europan currncy, and Φ = P / P its rlativ pric in currncis and (i.., GBP). Morovr, lt b / b th nominal xchang rat, th currncy pric of currncy, availabl on th dat (t-b). If LOP holds for flight f, thn: Φ = (1) or Δ = b P / P = / b [( / / ) P ] = 0 P, (2) 10 As Ellison and Ellison (2005) discuss, inrtia in Intrnt prics is oftn obsrvd, suggsting that companis do not continually monitor th markt situation and roptimiz. Morovr, w casually notd that aftr buying tickts on-lin from th LCCs in our study, fars rmaind unchangd dspit th obvious rduction in th sat availability. 9

10 with Δ xprssd in GBP. Th LOP fails to hold if / / 1 or Δ > 0. For th Φ b lattr cas, Tabl 2 rports th prcntil distribution of th absolut valu of Δ by airlin and typ of flights. Evn noting that small valus of Δ may b inducd by diffrncs btwn th xchang rats usd by us and by th airlins, mor that half of th obsrvations for intrnational airfars rport a Δ >2, whil th LOP holds unconditionally (i.., Δ =0) for at last th 99% of th obsrvd domstic fars, with th minor xcption of fars postd by Ryan Air. Such a finding suggsts two considrations. On, prsumably th airlins try to avoid th bad publicity of bing found out practicing pric discrimination stratgis, which can b mor asily notd whn th fars ar in th sam currncy. Two, th comparability of two fars in diffrnt currncis ntails th gathring of dtaild information on b /, which is a costly activity that not vryon is rady to undrtak. Thus in intrnational flights th airlins ar mor protctd by th risk of ngativ publicity and hav thrfor mor lway in ngaging in PD as a yild managmnt stratgy aimd at maximizing load factors. Finally, Tabl 2 shows that all th airlins, xcpt EasyJt, hav at last 5% of thir fars with a Δ >14, which is th uppr bound w chos to dfin th band of inaction. b Tabl 3 prsnts valus of Φ = P / P and brokn down by airlin and country. It confirms that th LOP holds for domstic flights, whil it gnrally dos not for intrnational flights, with th xcption of thos opratd by EasyJt, for which th two statistics ar vry similar across countris. For Buzz and GoFly, dviations from th LOP ar limitd to spcific countris, Switzrland and Franc, rspctivly. BmiBaby and MyTravl systmatically violat th LOP as, in all th countris thy srv, thir fars xprssd in th continntal Europan currncy ar, on avrag, highr than th on xprssd in GBP. On th othr hand, Ryan Air, which Tabls 2 and 3 rval to b th airlin which is mor havily rliant on intrnational PD, tnds to post a highr far in GBP for flights to and from Irland, Holland and Austria, with th opposit holding for all th othr countris, xcpt Swdn. To furthr highlight th dviations from LOP in our datast, Figur 5 shows, for ach / b airlin, th krnl dnsity for Φ = P / P and for flights to countris adopting th / Europan common currncy, th Euro. Th ovrlapping of th two distribution is indicativ of adhrnc to th LOP: this only sms to b th cas of EasyJt, whil for all th othr LCCs th two distributions ar ithr disjoint (BmiBaby and MyTravlLit) or th distribution of Φ prsnts thickr and longr tails (Ryan Air, Buzz and GoFly). As Φ appars to b mor disprs than th distribution of th xchang rat btwn th Euro and th GBP, Figur 5, as wll as th othr vidnc in this sction, provids supports to th notion that most LCCs hav pursud PD stratgis that hav ld to significant dviations from th LOP. Tabl 2 has also 10

11 highlightd how fars diffrncs for th sam typ of tickt may xcd th band of inaction, blow which w dm it not worthy to ngag in arbitrag. Howvr, it is still possibl that th dviations from th LOP in our datasts ar mostly du to situations quivalnt to thos dscribd by Figurs 2 and 3, in which arbitrag opportunitis ar ithr not profitabl or not prsnt. That is, if th Intrnt has cratd a frictionlss markt whr arbitrag opportunitis ar instantly wipd away by costlss sarch and ngligibl mnu costs, w should xpct vry fw cass of PD of th typ rprsntd in Figur 4. If, howvr, sarch costs wr hightnd by psychological inrtia on th customr s bhalf, thn arbitrag opportunitis would b offrd bcaus it would b highly unlikly that travllrs would b awar of thir prsnc. III. Pric Discrimination and Arbitrag In this sction w build on th discussion of th motivating xampls from Figurs 1 to 4 and invstigat th xtnt to which LCCs allow th possibility of arbitrag opportunitis to aris. To this purpos, w constructd th discrt variabl Discrimination Typ, taking four valus, ach rprsnting on of th four diffrnt situations dpictd in Figurs 1 to 4. Mor prcisly, a valu of zro is assignd to non-discriminatory obsrvations, that is, thos with Δ 7 (s also Figur 1). Although arbitrary, th valu of 7 was chosn bcaus 1) it is th middl point of th band of inaction ; 2) thr may b significant diffrncs btwn th xchang rats w usd and thos usd by th airlins. A valu of 1 is for discriminatory obsrvations that fall within th band of inaction, i.., thos with 7 Δ <14 (s Figur 2). 11 Discriminatory obsrvations with no arbitrag conditions (as in Figur 3) ar givn th valu 2, whil thos with arbitrag opportunitis (as in Figur 4) ar assignd th valu It is notworthy how for valus 1 to 3 of Discrimination Typ, Gorg Stiglr s (1987) dfinition of pric discrimination holds, as th marginal cost for a sat bookd at th sam tim for th sam flight has to b th sam rgardlss of whthr th booking taks plac in or in continntal Europ. 11 Th only montary factor contributing to th cration of th band of inaction is th paymnt of an xtra crdit card commission of about 4.5 GBP. Thus, travllrs with a low opportunity cost of tim, which is ncssary to do th sarch and fill in th booking form, might b intrstd in taking advantag of ths opportunitis. This is why a valu of 1 for Discrimination Typ is for cass dmd as discriminatory. Howvr, it dos not distinguish btwn th situations highlightd in Figurs 3 and 4. Whil in thory such a distinction would b fasibl, w chos not to implmnt it givn th low valu associatd with th arbitrag. 12 Formally, and rcalling that discrimination is possibl only on th scond lg of a round-trip, a valu 2 is assignd whn th flight dparts from th and Δ -14 or whn th flight dparts from continntal Europ and Δ 14. Similarly, a valu 3 is givn to obsrvations dparting from th and Δ 14 or whn th flight dparts from continntal Europ and Δ

12 In Tabl 4, th frquncis for th valus of Discrimination Typ ar brokn down by airlin and dpartur location for th sampl of intrnational flights. 13 Ovrall, about 3.8% of th obsrvations ar associatd with profitabl opportunitis of arbitrag, whil 19% xhibit charactristics of PD without arbitrag. Howvr, airlins show a diffrnt tndncy in pursuing PD stratgis on-lin. Th Total rows show how Ryan Air and GoFly ar th companis rporting th lowst prcntag of non-discriminatory fars (60.6% and 68.3%, rspctivly), and by far th highst prcntag of cass with Discrimination Typ qual or gratr than 2, 14.8% and 15.9% rspctivly. Convrsly, ths ar vry rar for EasyJt, which rports 93% of non-discriminatory fars. For th othr LCCs, discriminatory fars account for up to 25.6% of cass. Rcall from Tabl 3 how BmiBaby and MyTravlLit systmatically rcordd valus of P / P abov th rlvant xchang rat. Furthrmor, rcall that arbitrag opportunitis aris only for th scond lg, that is, th rturn flight. Tabl 4 shows that for BmiBaby, w rtrivd 4070 cass of profitabl arbitrag opportunitis for flights dparting from th, whil only 162 wr from continntal Europ. That is, BmiBaby offrs arbitrag opportunitis almost xclusivly to travllrs rsiding in a continntal Europan country. Howvr, thy ar also almost xclusivly th victims of PD (i.., whn Discrimination Typ is qual to 2). Indd, in 4979 cass dparting from continntal Europ, BmiBaby offrd a far b P / / for a first lg flight, which is at last 14 GBP highr than that offrd to British travllrs rturning to thir country. A similar analysis holds also for MyTravlLit, thus hlping to shd furthr lights on th figurs rportd in Tabl 3. Othr similaritis btwn Ryan Air and GoFly ar shown in Tabl 4. For both airlins w rtrivd a largr proportion of arbitrag opportunitis for flights dparting from continntal Europ (thus possibly bnfiting British travllrs). Ths account for 9.5% and 10.1% of Ryan Air and GoFly cass, rspctivly. At th sam tim, for th sam airlins a largr shar of cass with Discrimination Typ qual to 2 (rspctivly, 9.7% and 9.9%) is found to dpart from th, thus advrsly discriminating British travllrs rlativ to thir continntal Europan countrparts rturning from a visit to. Howvr, w also found a significant amount of cass whr non- rsidnt travllrs ar ithr offrd arbitrag opportunitis (5.3% for Ryan Air and 6.2% for GoFly) or ar th victims of PD (5.2% and 5.7%, rspctivly). Whil th distribution of cass with Discrimination Typ qual or gratr than 2 largly varis across 13 From now on, only intrnational flights ar considrd, givn that domstic flights ar gnrally not usd for PD purposs. 12

13 airlins and dpartur location, for smallr valus of Discrimination Typ w obsrv a mor vn distribution. Th analysis of Tabl 4 has clarly highlightd how most LCCs hav mad xtnsiv us of on-lin PD stratgis, vn whn ths ntail profitabl arbitrag conditions. As in Asplund and Fribrg (2001) w do not hav information rgarding whthr th customrs hav takn advantag of th opportunitis offrd. Howvr, th indirct vidnc from thir cas and ours can provid intrsting insights. Asplund and Fribrg (2001) argu that th practic of dual pric stting was abandond bcaus th high volatility of th xchang rat btwn SEK and FIM offrd larg arbitrag opportunitis to consumrs. In our cas, th data covrs th priod Jun 2002-Jun Howvr, th vidnc w rtrivd and rport in Figurs 1 to 4 was collctd much latr, in 2005 and in April This suggsts that amongst th airlins that our vidnc rvals to b havily committd to PD stratgis (namly, Ryan Air and GoFly), th on still activ (i.., Ryan Air) has carrid on practicing th various forms of PD w hav introducd in this papr. This is consistnt with two distinct, but not xclusiv xplanations. First, th nduring and systmatic practic of PD hints that LCCs customrs hav rmaind largly unawar of th prsnc of arbitrag opportunitis, dspit LCCs sll thir tickts almost xclusivly on-lin. This is furthr vidnc that th Intrnt is providing firms with nw and imaginativ pric stting schms. But unlik th firms slling computr RAM dscribd by Glnn Ellison and Sarah F. Ellison (2004), LCCs do not nd to implmnt sarch obfuscation tchniqus. Indd, diffrnt prics for th sam flight may b availabl on th sam wb sit at th sam tim. 14 Howvr, thy can b found out only if th on-lin customrs run two quris, instad of on. Th hurdl to ovrcom is thus not tchnical, or rlatd to significant diffrncs in th opportunity cost of tim to run an xtra qury, which would only tak a fw mor sconds. It is mainly associatd with th natural propnsity of th grat majority of travllrs to sarch for information on a round-trip tickt (which is th dfault option in th on-lin qury form). That is, w argu that thr xists a psychological inrtia rducing th liklihood of sarching what th pric of two singl tickts could b. This is consistnt with th prsnc of high, not low, sarch costs, broadly dfind. Th acid tst is providd by Tabl 4: indd, assum that half of th obsrvations with Discrimination Typ qual to 1 satisfy th condition of dparting from th right airport and thus prsnt opportunitis 14 Som airlins, howvr, hav rcntly bgun to ngag in obfuscation practics similar to th ons dscribd in Ellison and Ellison (2004). For instanc, travl insuranc is now automatically includd in th ordr, and th customrs hav to unclick to avoid bing chargd for it. Morovr, uncrtainty about th final pric ariss also bcaus th charg for landing fs and airport taxs is not spcifid togthr with th fars. 13

14 for nt savings via arbitrag. Thn, about 20% of cass from Ryan Air prsnt arbitrag conditions. This is quit a high proportion, hinting that ths opportunitis ar sldom takn. Scond, arbitrag chancs may b intntionally up for grabs. That is, LCCs post thm spcifically for th purpos of bing xrcisd or ar not too worrid if som savvy Intrntsurfr rcognizs thm. This lads to th natural qustion of why LCCs ngag in PD. In th nxt sction w adopt an conomtric approach to shd som light on th charactristics associatd with th diffrnt valus of th variabl Discrimination Typ. IV. Empirical modl W bgin invstigating what drivs th diffrnt valus of Discrimination Typ by looking at Tabl 5, whr ach cll rports th prcntag numbr of obsrvations by sasons (idntifid by th Summr April to Octobr - and Wintr Novmbr to March - timtabls), booking day, classs of fars for P xprssd in GBP and classs of fars for P convrtd in GBP. Within ach of ths catgoris, significant diffrncs can b obsrvd. Discriminatory cass ar mor likly during th Summr sason. Non-discriminatory obsrvations incras with th booking day, whil gnrally arbitrag opportunitis ar mor likly for lat booking fars, thos availabl from 14 up to 7 days prior to dpartur. Both findings rflct th fact that summr and lat booking fars ar gnrally highr and thus provid mor scop for larg diffrncs btwn and P. Indd, whn 70, mor than 45% of th obsrvations ar discriminatory in natur, with almost 8% offring profitabl arbitrag opportunitis. Similar but slightly smallr figurs ar obsrvd whn b P / / 70. Rlatdly, not how th incidnc of valus 2 and 3 for P Discrimination Typ incrass monotonically with th catgory of A. Economtric mthodology and dpndnt variabls P prics. In th conomtric invstigation, w ar intrstd in studying th diffrnt charactristics btwn non-discriminatory and discriminatory cass, and, for th sub-sampl of discriminatory cass, th distinguishing traits of th groups of cass with and without arbitrag opportunitis. To modl ths two discrt variabls and tak account of th sampl slction problm arising bcaus arbitrag can only occur within discriminatory cass, w mploy a bivariat probit modl with cnsoring stting (William Grn, 1998 and 2003, pp ; Piga and Vivarlli, 2004). Formally th modl can b rprsntd as follows: P 14

15 y y ( ε, ε ) ~ BVN(0,0,1,1, ρ) ( y 1 = β X, X 1 = β X ε, y 2 + ε, y 1 2 = 1 if = 1 if ) obsrvd only if y y 1* y 2 2* > 0, 0 othrwis > 0, 0 othrwis (3) = 1. Th discrt variabl y 2, which will b dnotd as Discriminatory, assums th valu of zro whn Discrimination Typ is also zro; Discriminatory is qual to 1 for valus of Discrimination Typ gratr or qual to 1. Th othr discrt variabl y 1, which w dnot as Arbitrag, is zro whn Discrimination Typ is qual to 1 or 2, and taks th valu 1 whn Discrimination Typ is qual to 3. No valu is attributd to Arbitrag whn Discrimination Typ is zro, as arbitrag conditions should b studid only within th sub-sampl of cass whr Discriminatory is qual to 1. Failing to tak this sampl slction into account by applying a standard bivariat probit modl whr Arbitrag is stimatd on th full sampl would rsult in biasd stimats. That is, in a standard bivariat probit approach th factors affcting th probability to obsrv a non-discriminatory cas would not b sparatd from factors influncing th liklihood of posting a discriminatory far that is not associatd with arbitrag opportunitis. 15 Furthrmor, stimating two indpndnt quations could lad to wrong infrnc if thir rsiduals wr corrlatd. Finally, to account for th fact that for ach daily flight w hav rpatd obsrvations, th stimatd standard rrors ar robust to htroschdasticity and srial corrlation within ach (irt) clustr. B Th rgrssors On way to tst if th airlins spcifically choos particular flights to practic PD is to chck if discriminatory obsrvations prsist ovr tim. Rcall how for ach irtc group, whr i idntifis th airlin, r th rout, t th dat of dpartur and c th flight cod numbr, w hav up to 11 obsrvations of fars pairs collctd from 70 until 7 days prior to dpartur. W crat th dummy Prsistnc qual to 1 if at last four obsrvations for th sam flights hav Δ A strictly positiv valu for Prsistnc indicats that th fars postd for a spcific flight dparting on dat t xhibit charactristics of PD for a priod of at last 14 days (i.., booking priod of 21, 14, 10 and 7) or mor. A positiv cofficint for Prsistnc would 15 Grn (1998) uss this modl to distinguish th factors affcting th probability of dfault in crdit card loans from th dtrminants of th antcdnt dcision to obtain a crdit card. Similarly, Piga and Vivarlli (2004) argu that th sampl of firms ngagd in collaborativ R&D activity is not randomly slctd, but dpnds on th firms dcision to conduct R&D. 16 This implis that at last four obsrvations in a irtc group hav a valu of Discrimination Typ qual to 2 or 3. This is th rason why w do not includ Prsistnc in th quation for Arbitrag, although its impact can still b valuatd via th marginal ffcts. 15

16 suggst that only crtain flights ar spcifically chosn to implmnt PD stratgis of th kind w hav introducd in this articl. This would b indicativ, for instanc, of dviations from th LOP bing mor likly for flights whr th airlins xpct to hav a low load factor. A positiv cofficint would not, howvr, allow to distinguish if, on th on hand, airlins ngag in PD bcaus thy fl protctd from arbitrag opportunitis (up to th point that thy lav thm postd for long priods of tim) or, on th othr, if thy intntionally maintain thm on-lin for so long just bcaus thy want Intrnt savvy travllrs to find thos opportunitis out. Tabl 6 shows som dscriptiv statistics for Prsistnc, of th variabl usd to gnrat it ( N of PD cass pr flight ) and of th othr rgrssors, brokn down by th valus of th dpndnt variabls. Th way Prsistnc and N of PD cass pr flight wr constructd is rflctd in Tabl 6, whr prsistnc ovr tim sms to b a charactristic of th discriminatory cass. Not, howvr, how Prsistnc qual to 1 is assignd also to thos non-discriminatory obsrvations that blong to a group whr w obsrv at last four discriminatory obsrvations. Thus, up to svn obsrvations in a group may hav Prsistnc qual to 1 but Discriminatory qual to zro. Thrfor, th conomtric procdur may still rval no diffrntial impact of Prsistnc. W us th monthly numbr of flights by an airlin in a rout to obtain th Hrfindahl Indx in a rout (hncforth, HHI rout ). 17 Following Bornstin and Ros (1994), if discrimination is of a monopoly-typ, thn th cofficint in th Discriminatory quation should b positiv. If howvr, discrimination incrass as th rout bcoms mor comptitiv, thn w can infr that th airlins us it as a stratgic wapon to nhanc thir markt shars. By th sam tokn, arbitrag opportunitis should b mor likly in mor comptitiv markts. Tabl 6 dos not rval any significant diffrnc, although it indicats th airlins in our sampl oprat in highly concntratd routs. Th monthly shar of all flights in a rout ovr th total flights opratd in a city-pair (hraftr, Shr Flights in rout ) capturs th xtnt to which a rout has substituts within a markt. 18 A smallr shar would imply a highr dgr of substitutability for th travllrs, lowr markt powr for th airlins and hnc lss scop to ngag in PD. Larg markts hav bn dominatd for long by stablishd carrirs, possibly formr national `flag-carrirs', which may rmain protctd by such barrirs to ntry as th "grandfathr" rights which post-libralisation allocatd slots in th main Europan, most congstd airports to airlins on th basis of prvious us. Markt Siz, obtaind as th shar 17 To calculat markt shars, flights ar prfrabl to numbr of passngrs as flights ar dcidd in th prvious sason and ar thrfor lss influncd by pricing considrations. 18 Th trms city-pair (which includs all th airports in a city pair) and markt ar usd intrchangably. 16

17 of total flights in a city-pair ovr th total flights in a nation s sub-ara, 19 is likly to affct positivly th liklihood to post discriminatory fars, but to influnc ngativly an airlin s propnsity to offr arbitrag opportunitis,.g., bcaus too many customrs may b availabl to find thm. Th prsnc of comptition from chartr oprators may boost th nd to ngag in PD and to offr arbitrag opportunitis. W xpct th monthly shar of chartr passngrs ovr th total numbr of passngrs in a city-pair ( Shr chartr pass. ) to b positivly corrlatd with discriminatory conditions and arbitrag opportunitis. If an airlin is offring a srvic to a givn dstination from many dpartur airports, thn th nd to ralis a sufficintly high load factor in vry rout is likly to provid a strong incntiv to implmnt PD stratgis, although its impact on th dcision to offr arbitrag opportunitis is lss clar-cut. Although for ach obsrvation collctd b days prior to dpartur pric disprsion is causd by pric discrimination, stochastic pak-load pricing may still b rsponsibl for disprsion ovr tim. Indd, th airlins may want to adjust thir pric as dmand is rvald ovr tim to rflct th shadow cost of capacity. W can control for stochastic pak-load pricing by including a st of dummy variabls for ach booking day (Bornstin and Ros, 1994). Ths ar discussd in Tabl 5. Fw days bfor dpartur th airlins can mor prcisly gaug if th flight will b full. Both dcisions to ngag in PD and to offr a discount via arbitrag may b thrfor motivatd by a high probability of a low load-factor. Thus, w xpct thm to b positivly associatd with th dummis idntifying th fars postd only a fw days bfor dpartur. Th prvious discussion has also highlightd company spcificitis, which ar capturd by a st of airlins dummis. Apart from Prsistnc, Tabl 6 shows no significant diffrnc btwn th statistics of ach rgrssor across th valus of th dpndnt variabls. This may b th consqunc of th rgrssors monthly frquncy, whil th dpndnt variabls rfr to daily flights. Thus, in th conomtric analysis, w also includ dummy variabls for th dstination nations and th days of th wk th flight dparts although, to sav on spac, ths ar not rportd in Tabl 7. Full sts of stimats ar availabl on rqust. 19 Th, as wll as th largst dstination countris, Italy, Franc, Grmany and Spain, wr dividd in thr sub-aras: North, Cntr and South. This variabl is calculatd as th shar of total flights in a city-pair (say, London to Rom) ovr th total flights to th Cntr of Italy (th sub-ara whr Rom is locatd). For smallr countris, th dnominator is givn by taking th whol country. 17

18 C. Rsults To stimat quation (3), only th sampl of flights to and from continntal Europ was usd, i.. domstic flights wr not considrd givn thir strict adhrnc to th LOP. Modl 1 includs all th airlins; Modl 2 xcluds EasyJt bcaus of its limitd involvmnt in pursuing PD stratgis; Modl 3 considrs Ryan Air xclusivly. For ach modl, th marginal ffcts of th rgrssors on Pr(Arbitrag=1 Discriminatory=1) ar shown. Th discussion will hing around th cofficints in Modl 3, which ar qualitativly similar to thos in Modl 2, and on thir diffrnc with thos in Modl 1. Prsistnc ovr tim charactrizs discriminatory cass: th xtrmly high z-statistics indicats that a larg proportion of obsrvations for th sam flight, collctd at diffrnt tims prior to dpartur, ar discriminatory in natur. Notably, a chang of Prsistnc from zro to on lads to a 26% incras in th probability to obsrv an arbitrag opportunity in th subsampl of discriminatory cass. Quit intrstingly, th cofficint for HHI rout varis across modls. It is ngativ in th full sampl, hinting that pric disprsion is mor likly in lss concntratd routs, insignificant in th scond modl, and positiv in th third. It would sm, thrfor, that Ryan Air practics a monopoly-typ form of discrimination, whil EasyJt uss it to compt against othr airlins in th sam rout. Such a rsult may b du to th htrognity charactrising th faturs of routs opratd by ach airlin. Indd, Ryan Air tnds to choos scondary, rgional airport whr no othr airlin flis. On th contrary, EasyJt (and GoFly bfor th takovr) oprats from main airports and thrfor facs toughr comptition from full srvic and low-cost carrirs alik (s Tabl 1). Arbitrag opportunitis ar lss likly in concntratd routs as wll as in largr markts, possibly a rflction of th dominant position njoyd by th airlin in th formr cas, and th prsnc of mor potntial arbitragurs in th lattr. Howvr, th siz and th prsnc of chartr oprators in a markt sm to boost th incntivs to pursu PD stratgis. Th lattr findings suggst a positiv association btwn th us of PD and comptition in th markt. Similarly, th numbr of dparturs usd by an airlin to srv a dstination incrass a firm s nd to us a widr rang of pricing tactics, although a chang in N dparturs from on to its man valu has a ngligibl impact on Pr(Arbitrag=1 Discriminatory=1). Th marginal ffct for Shr chartr pass. is on th contrary quit high (15%), and noticabl for Shr Flights in rout (3%). Th lattr two variabls ar also positivly corrlatd with th dcision to post discriminatory fars. Although not in Modl 1, th high dmand in th Summr sason probably xplains why lss discriminatory cass ar postd during this priod, and why this variabl dos not significantly affct th probability to 18

19 obsrv arbitrag opportunitis, although its cofficint is significant in th Arbitrag quation. Finally, all ls qual, discriminatory cass and arbitrag opportunitis sm to b mor likly in th last 14 days bfor a flight dparts, whn th airlins hav bn abl to gaug quit accuratly th dmand for a flight. V. Conclusions Th low sarch costs of th Intrnt facilitat pric comparisons on-lin that may vn lad to lowr off-lin prics (Jffry R. Brown and Austan Goolsb, 2002). To protct thmslvs from Brtrand-typ comptition, -rtailrs may ithr try to build brand allgianc or ngag in obfuscation stratgis (Eric Brynjolfsson and Michal D. Smith., 2000; Ellison and Ellison, 2004 and 2005). Givn th high pric transparncy of th Intrnt, it would thrfor sm unlikly to obsrv th sam company offring two diffrnt prics for th sam product on-lin. Th thrust of this papr is to show, through a particular data collction dsign, how som important Europan Low Cost Carrirs systmatically post fars on-lin that violat th Law of On Pric (Frd S. McChsny t al., 2004). Our analysis still supports th notion of low sarch costs on-lin. Indd w find airlins do not practic PD for U.K. domstic flights, bcaus thir fars, bing xprssd in th sam currncy, can b mor asily compard. As discrimination is applid only to intrnational flights, w argu that othr forms of sarch costs rmain important, vn if th transaction taks plac on-lin: an obvious xampl is larning about th currnt xchang rat that crdit card companis will apply. Howvr, th strongst factor facilitating PD is probably rlatd to th inability of an on-lin customr to control for th prsnc of arbitrag opportunitis, which ar oftn obsrvd in our datast. Assuming that all ths difficultis ar ovrcom, w also argu that airlins may actually bnfit from having customrs acting as arbitragurs, as discrimination may hlp incras a flight s load-factor. Indd, th vidnc indicats discriminatory cass ar mor likly within th two wks prior to a flights dpartur, whn th airlins hav bttr information about dmand ralization. Whn associatd with th offring of discounts via arbitrag, th form of on-lin pric discrimination w prsnt is thrfor likly to b wlfar-nhancing, as it dos not pnaliz th airlins and allows consumption by customrs that othrwis would not hav purchasd th tickt. W us a bivariat modl with sampl slction to study th factors affcting th dcisions to both post discriminatory fars and offr arbitrag opportunitis. W gnrally find that thir liklihood incrass with th dgr of comptition in th rout or in th markt, thrby suggsting th airlins us PD as a comptitiv wapon. A striking rsult is that ovr a priod of 70 days discriminatory cass for a flight ar oftn obsrvd four tims or mor at 19

20 rgular tim intrvals. Evn mor strikingly for an on-lin markt, arbitrag opportunitis tnd to prsist ovr tim and rmain postd for 14 days or mor. This is in shark contrast with th convntional wisdom of arbitrag bing incompatibl with discriminatory pricing, spcially in markts with low sarch or transportation costs. On th whol, th vidnc sms to suggst how airlins do not sm particularly worrid by th pric transparncy of th Intrnt, but, rathr, us it to maximiz thir yild in a rout. 20

21 Bibliography Asplund, Marcus and Richard Fribrg. (2001). Th Law of On Pric in Scandinavian Duty- Fr Stors, Amrican Economic Rviw, Vol. 91 (4), Bachis, Enrico and Claudio A. Piga (2006), Do Prics grow mor in Euro-Land? Evidnc from th Airlin Industry, Discussion Papr Sris, N. 2006_8, Economics Dpartmnt, Loughborough Univrsity, Bornstin, Svrin, Hubs and High Fars: Airport Dominanc and Markt Powr in th U.S. Airlin Industry, Rand Journal of Economics, 20, pp Bornstin, Svrin, Th Dominant-Firm Advantag in Multiproduct Industris: Evidnc from th U.S. Airlin Industry, Quartrly Journal of Economics, 106, Bornstin, Svrin, and Nancy L. Ros. (1994). Comptition and Pric Disprsion in th U.S Airlin Industry, Journal of Political Economy 102, Brynjolfsson, Erik, and Michal D. Smith. (2000). Frictionlss Commrc? A Comparison of Intrnt and Convntional Rtailrs, Managmnt Scinc 46: Clmons, Eric K., Il-Horn Hann and Lorin M. Hitt. (2002). Pric Disprsion and Diffrntiation in Onlin Travl: An Empirical Invstigation, Managmnt Scinc, 48 (4), Ellison, Glnn, and Sara Fishr Ellison, Lssons about Markts from th Intrnt, Journal of Economic Prspctivs, 19(2), Spring, Ellison, Glnn, and Sara Fishr Ellison. (2004). Sarch, Obfuscation, and Pric Elasticitis on th Intrnt, NBER WORKING PAPER SERIES. Working Papr Giaum, Stphani, and Sarah Guillou. (2004). Pric Discrimination and Concntration in Europan Airlin Markt, Journal of Air Transport and Managmnt 10(5), Goldbrg, Pinlopi K. and Michal M. Knttr. (1997). Goods Prics and Exchang Rats: What Hav W Larnd?, Journal of Economic Litratur, XXXV, Spt., Grn, William H. (1998). Sampl Slction in crdit-scoring modls, Japan and th World Economy, 10, Grn, William H. (2003). Economtric Analysis. Prntic Hall, Uppr Saddl Rivr, NJ, 5 th dition. McChsny, Frd S., William F. Shughart, and David Haddock. (2004). On th Intrnal Contradictions of th Law of On Pric, Economic Inquiry 42(4),

22 Mussa, Michal and Shrwin Rosn. (1978). Monopoly and Product Quality, Journal of Economic Thory, 37(3), Pls, Eric, and Pit Ritvld. (2004). Airlin pricing bhaviour in th London-Paris markt, Journal of Air Transport Managmnt 10, Piga, Claudio A., and Marco Vivarlli, (2004), Intrnal and Extrnal R&D: a Sampl Slction Approach, Oxford Bulltin of Economics and Statistics, 66(4), Stavins, Joanna. (2001). Pric Discrimination in th Airlin Markt: Th Effct of Markt Concntration, Th Rviw of Economics and Statistics 83 (1), Stiglr, Gorg J. (1987). Do Entry Conditions Vary across Markts? Commnts and Discussion. Brookings Paprs on Economic Activity, 3, Tirol. Jan (1988). Th Thory of Industrial Organization, MIT Prss, Cambridg MA. 22

23 Figur 1: Th standard cas with no pric discrimination. ~118GBP 23

24 Figur 2: An xampl of pric discrimination with low valu of arbitrag 24

25 Figur 3: An xampl of pric discrimination without th possibility of arbitrag. ~83GBP 25

26 Figur 4: An xampl of pric discrimination with possibility of arbitrag. ~41GBP 26