Garrett Scott

Job market paper

Screening with Refunds: Evidence from the Airline Industry

Uncertainty and risk aversion play an important role in consumer decision making in many settings. Using novel proprietary data from an airline that includes passenger-level bookings and cancellations, I study the effectiveness of screening by airlines on consumer uncertainty using a menu of refunds. I find that 12.15% of tickets are canceled and associated fees make up 2.69% of the airline’s revenue, and itineraries with lower fees are cancelled more often. To study the welfare implications of alternative refund strategies, I develop and estimate a model in which consumers face dynamic prices and make purchase decisions over tickets differentiated by quality and cancellation fees. I find that strategies that provide greater flexibility to consumers reduce profits more than the increase in consumer welfare.