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The Entry of Low-Cost Airlines: Price Competition in the European Airline Market

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Author Info

  • Marco Alderighi

    ()
    (CERTeT - Bocconi University, Milan)

  • Alessandro Cento

    ()
    (KLM Royal Dutch Airlines, Revenue Management Dept, Milan)

  • Peter Nijkamp

    ()
    (Faculty of Economics and Business Administration, Vrije Universiteit Amsterdam)

  • Piet Rietveld

    ()
    (Faculty of Economics and Business Administration, Vrije Universiteit Amsterdam)

Abstract

This paper investigates the response of full service carriers (FSCs) to theentry of low-cost carriers (LCCs). We develop a model of airlinecompetition, which accommodates various market structures, some ofwhich include low-cost players. Using data on published airfares ofLufthansa, British Airways, Alitalia and KLM for the main city-pairs fromItaly to the rest of Europe, our statistical modelling resu1ts confirm theconclusions of the theoretical model. Competition among FSCs appears toaffect the price levels of business and leisure segments asymmetrically. Incontrast, competition with LCCs reduces the fares of FSCs in all classesproportionally.

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Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 04-074/3.

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Date of creation: 02 Jul 2004
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Handle: RePEc:dgr:uvatin:20040074

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Web page: http://www.tinbergen.nl

Related research

Keywords: Pricing strategies; yield management; low-cost carriers; European airline market;

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References

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  1. Mark G. Lijesen & Piet Rietveld & Peter Nijkamp, 2000. "Do European Carriers dominate their Hubs?," Tinbergen Institute Discussion Papers 00-071/3, Tinbergen Institute.
  2. Ivaldi, Marc & Martimort, David, 1993. "Competition under Nonlinear Pricing," IDEI Working Papers 29, Institut d'Économie Industrielle (IDEI), Toulouse.
  3. Brander, James A. & Zhang, Anming, 1993. "Dynamic oligopoly behaviour in the airline industry," International Journal of Industrial Organization, Elsevier, vol. 11(3), pages 407-435, September.
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  5. Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, vol. 18(2), pages 301-317, August.
  6. Rochet, Jean-Charles & Stole, Lars A, 2002. "Nonlinear Pricing with Random Participation," Review of Economic Studies, Wiley Blackwell, vol. 69(1), pages 277-311, January.
  7. Valletti, Tommaso M., 2000. "Price discrimination and price dispersion in a duopoly," Research in Economics, Elsevier, vol. 54(4), pages 351-374, December.
  8. Severin Borenstein & Nancy L. Rose, 1991. "Competition and Price Dispersion in the U.S. Airline Industry," NBER Working Papers 3785, National Bureau of Economic Research, Inc.
  9. Starkie, David, 2002. "Airport regulation and competition," Journal of Air Transport Management, Elsevier, vol. 8(1), pages 63-72.
  10. Wilson, Robert, 1997. "Nonlinear Pricing," OUP Catalogue, Oxford University Press, number 9780195115826, September.
  11. Stole, Lars A, 1995. "Nonlinear Pricing and Oligopoly," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 4(4), pages 529-62, Winter.
  12. Carlton, Dennis W, 1977. "Peak Load Pricing with Stochastic Demand," American Economic Review, American Economic Association, vol. 67(5), pages 1006-10, December.
  13. Armstrong, Mark, 1996. "Multiproduct Nonlinear Pricing," Econometrica, Econometric Society, vol. 64(1), pages 51-75, January.
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Cited by:
  1. Ofelia Betancor & Juan Luis Jiménez, 2011. "When trains go faster than planes: the strategic reaction of airlines in Spain," ERSA conference papers ersa11p295, European Regional Science Association.
  2. David Edward Pitfield, 2004. "Airline Price Competition: A Time Series Analysis of 'Low-Cost' Carriers," ERSA conference papers ersa04p680, European Regional Science Association.
  3. Mark Lijesen & Peter Nijkamp & Eric Pels, 2005. "The Home Carrier Advantage in Civil Aviation," Tinbergen Institute Discussion Papers 05-011/3, Tinbergen Institute.

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