IDEAS home Printed from https://ideas.repec.org/a/zbw/kdijep/v37y2015i1p1-18.html
   My bibliography  Save this article

An Empirical Study of the Effect of the Internet on Fares in the U.S. Airline Industry

Author

Listed:
  • Lee, Hwa Ryung

Abstract

A reduction in search costs is generally believed to make markets more competitive. However, the effect may be mitigated or amplified if consumers must pay costs for switching products. This paper investigates how search costs affect prices in the presence of switching costs using U.S. domestic airfare data for 2000-2010. The airline industry experienced a dramatic decrease in search costs with increasing Internet use in the 2000s. At the same time, the industry is known for its frequent flyer programs (FFPs), which increase switching costs for consumers. We use the average network size of airlines in a market as a proxy for switching costs related to FFPs and Internet usage as a proxy for (the inverse of) search costs. The results show that increasing Internet usage lowers airfares but that the effect is smaller for markets with a larger average network size.

Suggested Citation

  • Lee, Hwa Ryung, 2015. "An Empirical Study of the Effect of the Internet on Fares in the U.S. Airline Industry," KDI Journal of Economic Policy, Korea Development Institute (KDI), vol. 37(1), pages 1-18.
    • Handle: RePEc:zbw:kdijep:v:37:y:2015:i:1:p:1-18
    DOI: 10.23895/kdijep.2015.37.1.1
    as

    Download full text from publisher

    File URL: https://www.econstor.eu/bitstream/10419/200765/1/kdi-jep-37-1-1.pdf
    Download Restriction: no
    File URL: https://libkey.io/10.23895/kdijep.2015.37.1.1?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Wilson, Chris M, 2009. "Market Frictions: A Unified Model of Search and Switching Costs," MPRA Paper 13672, University Library of Munich, Germany.
    2. Severin Borenstein, 1991. "Selling Costs and Switching Costs: Explaining Retail Gasoline Margins," RAND Journal of Economics, The RAND Corporation, vol. 22(3), pages 354-369, Autumn.
    3. Rhee, Ki-Eun, 2014. "What types of switching costs to create under behavior-based price discrimination?," International Journal of Industrial Organization, Elsevier, vol. 37(C), pages 209-221.
    4. Kenneth G. Elzinga & David E. Mills, 1998. "Switching Costs in the Wholesale Distribution of Cigarettes," Southern Economic Journal, John Wiley & Sons, vol. 65(2), pages 282-293, October.
    5. Shy, Oz, 2002. "A quick-and-easy method for estimating switching costs," International Journal of Industrial Organization, Elsevier, vol. 20(1), pages 71-87, January.
    6. V. Brian Viard, 2007. "Do switching costs make markets more or less competitive? The case of 800-number portability," RAND Journal of Economics, RAND Corporation, vol. 38(1), pages 146-163, March.
    7. Elisabeth Honka, 2014. "Quantifying search and switching costs in the US auto insurance industry," RAND Journal of Economics, RAND Corporation, vol. 45(4), pages 847-884, December.
    8. Eugene Orlov, 2011. "How Does The Internet Influence Price Dispersion? Evidence From The Airline Industry," Journal of Industrial Economics, Wiley Blackwell, vol. 59(1), pages 21-37, March.
    9. Caminal, Ramon & Matutes, Carmen, 1990. "Endogenous switching costs in a duopoly model," International Journal of Industrial Organization, Elsevier, vol. 8(3), pages 353-373, September.
    10. Mara Lederman, 2007. "Do enhancements to loyalty programs affect demand? The impact of international frequent flyer partnerships on domestic airline demand," RAND Journal of Economics, RAND Corporation, vol. 38(4), pages 1134-1158, December.
    11. Jean‐Pierre Dubé & Günter J. Hitsch & Peter E. Rossi, 2010. "State dependence and alternative explanations for consumer inertia," RAND Journal of Economics, RAND Corporation, vol. 41(3), pages 417-445, September.
    12. Kim, Moshe & Kliger, Doron & Vale, Bent, 2003. "Estimating switching costs: the case of banking," Journal of Financial Intermediation, Elsevier, vol. 12(1), pages 25-56, January.
    13. Shane M. Greenstein, 1993. "Did Installed Base Given an Incumbent Any (Measurable) Advantages in Federal Computer Procurement?," RAND Journal of Economics, The RAND Corporation, vol. 24(1), pages 19-39, Spring.
    14. Rajiv Lal & Miklos Sarvary, 1999. "When and How Is the Internet Likely to Decrease Price Competition?," Marketing Science, INFORMS, vol. 18(4), pages 485-503.
    15. Moshkin, N. & Shachar, R., 2000. "Switching Costs or Search Costs?," Papers 3-2000, Tel Aviv.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Michael Grubb, 2015. "Failing to Choose the Best Price: Theory, Evidence, and Policy," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 47(3), pages 303-340, November.
    2. Quan Dong & Juan Carlos Bàrcena-Ruiz, 2017. "Privatization and Entry with Switching Costs," Manchester School, University of Manchester, vol. 85(4), pages 491-510, July.
    3. V. Brian Viard, 2007. "Do switching costs make markets more or less competitive? The case of 800-number portability," RAND Journal of Economics, RAND Corporation, vol. 38(1), pages 146-163, March.
    4. Srinuan, Pratompong & Srinuan, Chalita & Bohlin, Erik, 2014. "An empirical analysis of multiple services and choices of consumer in the Swedish telecommunications market," Telecommunications Policy, Elsevier, vol. 38(5), pages 449-459.
    5. Janssen, Aljoscha, 2020. "Switching Costs, Brand Premia and Behavioral Pricing in the Pharmaceutical Market," Working Paper Series 1317, Research Institute of Industrial Economics.
    6. Bouckaert, Jan & Degryse, Hans & Provoost, Thomas, 2010. "Enhancing market power by reducing switching costs," Economics Letters, Elsevier, vol. 109(2), pages 131-133, November.
    7. Gábor Kézdi & Gergely Csorba, 2013. "Estimating Consumer Lock-In Effects from Firm-Level Data," Journal of Industry, Competition and Trade, Springer, vol. 13(3), pages 431-452, September.
    8. Jorge Fernández‐Ruiz, 2019. "A Mixed Duopoly With Switching Costs," The Japanese Economic Review, Japanese Economic Association, vol. 70(2), pages 235-257, June.
    9. Andrew Rhodes, 2014. "Re-examining the effects of switching costs," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 57(1), pages 161-194, September.
    10. Aljoscha Janssen, 2022. "Price dynamics of Swedish pharmaceuticals," Quantitative Marketing and Economics (QME), Springer, vol. 20(4), pages 313-351, December.
    11. Florez-Acosta, Jorge & Herrera-Araujo, Daniel, 2020. "Multiproduct retailing and consumer shopping behavior: The role of shopping costs," International Journal of Industrial Organization, Elsevier, vol. 68(C).
    12. Bernard Caillaud & Romain De Nijs, 2014. "Strategic Loyalty Reward in Dynamic Price Discrimination," Marketing Science, INFORMS, vol. 33(5), pages 725-742, September.
    13. Miguel Villas-Boas, J., 2015. "A short survey on switching costs and dynamic competition," International Journal of Research in Marketing, Elsevier, vol. 32(2), pages 219-222.
    14. Anderson, Robert D.J. & Ashton, John K. & Hudson, Robert S., 2014. "The influence of product age on pricing decisions: An examination of bank deposit interest rate setting," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 31(C), pages 216-230.
    15. Luttmann, Alexander & Ladd, Daniel, 2023. "Loyalty rewards and redemption behavior: Stylized facts for the U.S. airline industry," MPRA Paper 119214, University Library of Munich, Germany.
    16. Richards, Timothy J. & Liaukonyte, Jura, 2018. "Switching Cost and Store Choice," 2018 Annual Meeting, August 5-7, Washington, D.C. 274201, Agricultural and Applied Economics Association.
    17. Deuflhard, Florian, 2018. "Quantifying inertia in retail deposit markets," SAFE Working Paper Series 223, Leibniz Institute for Financial Research SAFE.
    18. Kim, Moshe & Kliger, Doron & Vale, Bent, 2003. "Estimating switching costs: the case of banking," Journal of Financial Intermediation, Elsevier, vol. 12(1), pages 25-56, January.
    19. Miah, Mohammad Dulal & Kabir, Md. Nurul & Safiullah, Md, 2020. "Switching costs in Islamic banking: The impact on market power and financial stability," Journal of Behavioral and Experimental Finance, Elsevier, vol. 28(C).
    20. Federico Rossi & Pradeep K. Chintagunta, 2023. "Consumer Loyalty Programs and Retail Prices: Evidence from Gasoline Markets," Marketing Science, INFORMS, vol. 42(4), pages 794-818, July.

    More about this item

    Keywords

    Search costs; Switching costs; Internet; Frequent Flyer Program; Airline industry;
    All these keywords.

    JEL classification:

    • D1 - Microeconomics - - Household Behavior
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • L93 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Air Transportation
    • M3 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:zbw:kdijep:v:37:y:2015:i:1:p:1-18. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ZBW - Leibniz Information Centre for Economics (email available below). General contact details of provider: https://edirc.repec.org/data/kdiiikr.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.