Second-Degree Price Discrimination and Intergroup Externalities in Airline Routes Between European Cities

This paper presents a model of second-degree price discrimination and inter-group effects. Consumer heterogeneity is assumed on both a horizontal and a vertical dimension, while various distinct market structures, some of which include low-cost carriers (LCCs), are considered. We theoretically show that the rivalry among full-service carriers (FSCs) usually reduces the distance between business and leisure fares. The rivalry with an LCC increases this distance causing a reduction of leisure fares and, possibly, an increase of business fares. We test these implications using data concerning the early stage of low-cost entry in Italy on European routes. The empirical results largely support our theoretical findings.