ADVANCE-PURCHASE DISCOUNTS AND MONOPOLY ALLOCATION OF CAPACITY

Optimal pricing by a monopoly airline that faces capacity constraints during the peak demand period is studied. The existence of capacity constraints means that in order to expand output the airline must divert demand from the peak period to the off-peak period. A particular advance-purchase discount policy is shown to be the profit-maximizing method of selling tickets. If the advance-purchase requirement were infeasible, output and total surplus would both be lower.(JEL L12)