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Price dispersion under costly capacity and demand uncertainty

Author: Diego Escobari; Li Gan; National Bureau of Economic Research.
Publisher: Cambridge, Mass. : National Bureau of Economic Research, 2007.
Series: Working paper series (National Bureau of Economic Research), no. 13075.
Edition/Format:   eBook : Document : EnglishView all editions and formats
Summary:
This paper tests the empirical importance of the price dispersion predictions of the Prescott-Eden-Dana (PED) models. Equilibrium price dispersion is derived in a setting with costly capacity and demand uncertainty where different fares can be explained by the different selling probabilities. The PED models predict that a lower selling probability leads to a higher price. Moreover, this effect is larger in more  Read more...
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Material Type: Document, Internet resource
Document Type: Internet Resource, Computer File
All Authors / Contributors: Diego Escobari; Li Gan; National Bureau of Economic Research.
OCLC Number: 124133398
Description: 1 online resource (1 volume).
Series Title: Working paper series (National Bureau of Economic Research), no. 13075.
Responsibility: Diego Escobari, Li Gan.

Abstract:

This paper tests the empirical importance of the price dispersion predictions of the Prescott-Eden-Dana (PED) models. Equilibrium price dispersion is derived in a setting with costly capacity and demand uncertainty where different fares can be explained by the different selling probabilities. The PED models predict that a lower selling probability leads to a higher price. Moreover, this effect is larger in more competitive markets. Despite its applications to several important market phenomena, there exists little empirical evidence supporting the PED models, mostly because of the difficulty of coming up with an appropriate measure of the selling probabilities. Using a unique panel of U.S. airline fares and seat inventories, we find evidence that strongly supports both predictions of the models. After controlling for the effect of aggregate demand uncertainty on fares, we also obtain evidence of second degree price discrimination in the form of advance-purchase discounts.

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