| Abstract: | This paper analyzes third‐degree price discrimination of a monopoly airline in the presence of congestion externality when all markets are served. The model features the business‐passenger and leisure‐passenger markets where business passengers exhibit a higher time valuation, and a less price‐elastic demand, than leisure passengers. Our main result is the identification of the time‐valuation effect of price discrimination, which can work in the opposite direction as the well‐known output effect on welfare. This time‐valuation effect clearly explains why discriminating prices can improve welfare even when this is associated with a reduction in aggregate output. |
