Low-cost airlines and online price dispersion

This paper presents a new form of online pricing tactic where airlines post, at the same time and for the same flight, fares in different currencies that violate the Law of One Price. Unexpectedly for an online market, price dispersion may be accompanied by a hidden discount that tends to persist in the period preceding a night's departure. The econometric analysis reveals that airlines post dispersive fares in less competitive routes with more heterogeneous demand. Furthermore, temporal persistence of intra-firm fare dispersion suggests that it is an equilibrium phenomenon engendered by the airlines' need to manage stochastic demand conditions for a specific flight. (C) 2011 Elsevier B.V. All rights reserved.