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Does Price Matter? Price and Non-price Competition in the Airline Industry

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  • Philip G. Gayle

Abstract

This paper studies passengers' choice behavior in air travel. Products are defined as a unique combination of airline and flight itinerary while markets are defined as a directional round-trip air travel between an origin and a destination city. A structural econometric model is used to investigate the relative importance of price (airfare) and non-price product characteristics in explaining passengers' choice of these differentiated products. The results suggest that, on average, prices may not be as important as we think in explaining passengers' choice behavior among alternative products. Non-price characteristics which may include convenience of flight schedules, frequent flyer programs, the quality of in-flight service, among other things, seem to be much more important in explaining passengers' choice behavior. As such, the results have implications for the focus of antitrust policies in the airline industry when assessing the impact of mergers, alliances, or other business decisions of airlines

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Bibliographic Info

Paper provided by Econometric Society in its series Econometric Society 2004 North American Summer Meetings with number 163.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:nasm04:163

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Related research

Keywords: Discrete Choice; Mixed Logit; Airlines; Hub and Spoke Network; Frequent Flyer Programs;

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  1. Kim, E Han & Singal, Vijay, 1993. "Mergers and Market Power: Evidence from the Airline Industry," American Economic Review, American Economic Association, American Economic Association, vol. 83(3), pages 549-69, June.
  2. Richard, Oliver, 2003. "Flight frequency and mergers in airline markets," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 21(6), pages 907-922, June.
  3. Jerry HAUSMAN & Gregory LEONARD & J. Douglas ZONA, 1994. "Competitive Analysis with Differentiated Products," Annales d'Economie et de Statistique, ENSAE, issue 34, pages 159-180.
  4. Bamberger, Gustavo E & Carlton, Dennis W & Neumann, Lynette R, 2004. "An Empirical Investigation of the Competitive Effects of Domestic Airline Alliances," Journal of Law and Economics, University of Chicago Press, University of Chicago Press, vol. 47(1), pages 195-222, April.
  5. Borenstein, Severin, 1990. "Airline Mergers, Airport Dominance, and Market Power," American Economic Review, American Economic Association, American Economic Association, vol. 80(2), pages 400-404, May.
  6. Steven Berry & Michael Carnall & Pablo T. Spiller, 1996. "Airline Hubs: Costs, Markups and the Implications of Customer Heterogeneity," NBER Working Papers 5561, National Bureau of Economic Research, Inc.
  7. Brueckner, Jan K & Whalen, W Tom, 2000. "The Price Effects of International Airline Alliances," Journal of Law and Economics, University of Chicago Press, University of Chicago Press, vol. 43(2), pages 503-45, October.
  8. Hausman, J.A., 1994. "Valuation of New Goods Under Perfect and Imperfect Competition," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 94-21, Massachusetts Institute of Technology (MIT), Department of Economics.
  9. Berry, Steven T, 1990. "Airport Presence as Product Differentiation," American Economic Review, American Economic Association, American Economic Association, vol. 80(2), pages 394-99, May.
  10. Aviv Nevo, 2000. "A Practitioner's Guide to Estimation of Random-Coefficients Logit Models of Demand," Journal of Economics & Management Strategy, Wiley Blackwell, Wiley Blackwell, vol. 9(4), pages 513-548, December.
  11. Brueckner, Jan K., 2001. "The economics of international codesharing: an analysis of airline alliances," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 19(10), pages 1475-1498, December.
  12. Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, Econometric Society, vol. 63(4), pages 841-90, July.
  13. Newey, Whitney K & West, Kenneth D, 1987. "Hypothesis Testing with Efficient Method of Moments Estimation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 28(3), pages 777-87, October.
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Cited by:
  1. Steven Berry & Panle Jia, 2010. "Tracing the Woes: An Empirical Analysis of the Airline Industry," American Economic Journal: Microeconomics, American Economic Association, American Economic Association, vol. 2(3), pages 1-43, August.

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