ADVANCE-PURCHASE DISCOUNTS AND MONOPOLY ALLOCATION OF CAPACITY.

Abstract

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 outp ut 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 surpl us would both be lower. Copyright 1993 by American Economic Association.