Monopoly Price Discrimination when Markets are Interdependent
This paper analyzes third-degree price discrimination of a monopoly airline when markets are interdependent because of congestion. The model features business and leisure passenger markets, where the business passenger demand is inelastic relative to leisure passenger demand and business passengers exhibit a high time valuation relative to leisure passengers. There are two types of prices: ticket-prices and full fares, where the latter are composed of ticket-prices and per-passenger congestion costs. In this set-up, ticket-price discrimination can reduce or increase ticket-prices or full fares in all markets relative to a scenario with uniform ticket-prices. Furthermore, we identify a time-valuation effect of ticket-price discrimination, which works into the opposite direction than the well known output effect. Discriminating ticket-prices can therefore increase welfare when this is associated with a reduction in the aggregate passenger quantity.