IDEAS home Printed from https://ideas.repec.org/p/pra/mprapa/119214.html
   My bibliography  Save this paper

Loyalty rewards and redemption behavior: Stylized facts for the U.S. airline industry

Author

Listed:
  • Luttmann, Alexander
  • Ladd, Daniel

Abstract

Over the past forty years, one of the most important datasets in industrial organization has been the Airline Origin and Destination Survey (DB1B). Most studies relying on these data remove tickets with fares less than $20, assuming that these are heavily discounted frequent flyer awards (FFAs). We investigate the validity of this approach by first defining the size of the frequent flyer market using annual Form 10-K filings. Exploiting a federal regulation, we then outline a novel approach to identify FFAs in the DB1B. Our method indicates that the $20 cutoff used by researchers is too high and may be lowered to $12 for tickets appearing in the DB1B after February 1, 2002. Using the FFAs we identify, we show how the characteristics of award tickets differ from paid tickets and how these characteristics have changed over time. We then demonstrate how various market and product quality characteristics influence the share of passengers traveling on FFAs. Finally, we find that price dispersion increases on routes with higher shares of frequent flyer passengers, implying that airline loyalty programs enhance market power.

Suggested Citation

  • 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.
    • Handle: RePEc:pra:mprapa:119214
    as

    Download full text from publisher

    File URL: https://mpra.ub.uni-muenchen.de/119214/2/MPRA_paper_119214.pdf
    File Function: original version
    Download Restriction: no
    File URL: https://mpra.ub.uni-muenchen.de/119738/10/MPRA_paper_119738.pdf
    File Function: revised version
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. José Azar & Martin C. Schmalz & Isabel Tecu, 2018. "Anticompetitive Effects of Common Ownership," Journal of Finance, American Finance Association, vol. 73(4), pages 1513-1565, August.
    2. Ramon Caminal, 2012. "The Design and Efficiency of Loyalty Rewards," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 21(2), pages 339-371, June.
    3. John Kwoka & Kevin Hearle & Phillippe Alepin, 2016. "From the Fringe to the Forefront: Low Cost Carriers and Airline Price Determination," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 48(3), pages 247-268, May.
    4. Paul Klemperer, 1995. "Competition when Consumers have Switching Costs: An Overview with Applications to Industrial Organization, Macroeconomics, and International Trade," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 62(4), pages 515-539.
    5. Jan K. Brueckner & Darin N. Lee & Pierre M. Picard & Ethan Singer, 2015. "Product Unbundling in the Travel Industry: The Economics of Airline Bag Fees," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 24(3), pages 457-484, September.
    6. Federico Ciliberto & Jonathan W. Williams, 2014. "Does multimarket contact facilitate tacit collusion? Inference on conduct parameters in the airline industry," RAND Journal of Economics, RAND Corporation, vol. 45(4), pages 764-791, December.
    7. Gayle, Philip G. & Thomas, Tyson, 2016. "Assessing firm behavior in carve-out markets: Evidence on the impact of carve-out policy," Journal of Economic Behavior & Organization, Elsevier, vol. 128(C), pages 178-194.
    8. Dan Luo, 2014. "The Price Effects of the Delta/Northwest Airline Merger," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 44(1), pages 27-48, February.
    9. Gayle, Philip G. & Wu, Chi-Yin, 2013. "A re-examination of incumbents’ response to the threat of entry: Evidence from the airline industry," Economics of Transportation, Elsevier, vol. 2(4), pages 119-130.
    10. Brueckner, Jan K & Whalen, W Tom, 2000. "The Price Effects of International Airline Alliances," Journal of Law and Economics, University of Chicago Press, vol. 43(2), pages 503-545, October.
    11. Austan Goolsbee & Chad Syverson, 2008. "How Do Incumbents Respond to the Threat of Entry? Evidence from the Major Airlines," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 123(4), pages 1611-1633.
    12. Sophia Li & Joe Mazur & Yongjoon Park & James Roberts & Andrew Sweeting & Jun Zhang, 2022. "Repositioning and market power after airline mergers," RAND Journal of Economics, RAND Corporation, vol. 53(1), pages 166-199, March.
    13. Steven Berry & Panle Jia, 2010. "Tracing the Woes: An Empirical Analysis of the Airline Industry," American Economic Journal: Microeconomics, American Economic Association, vol. 2(3), pages 1-43, August.
    14. Luttmann, Alexander, 2019. "Evidence of directional price discrimination in the U.S. airline industry," International Journal of Industrial Organization, Elsevier, vol. 62(C), pages 291-329.
    15. Philip G. Gayle & Xin Xie, 2018. "Entry Deterrence And Strategic Alliances," Economic Inquiry, Western Economic Association International, vol. 56(3), pages 1898-1924, July.
    16. Fukui, Hideki, 2019. "How do slot restrictions affect airfares? New evidence from the US airline industry," Economics of Transportation, Elsevier, vol. 17(C), pages 51-71.
    17. Donggeun Kim & Myongjin Kim & Kerry Tan, 2021. "Tacit collusion and price dispersion in the presence of Southwest Airlines," Southern Economic Journal, John Wiley & Sons, vol. 88(1), pages 3-32, July.
    18. Federico Ciliberto & Jonathan W. Williams, 2010. "Limited Access to Airport Facilities and Market Power in the Airline Industry," Journal of Law and Economics, University of Chicago Press, vol. 53(3), pages 467-495.
    19. 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.
    20. Philip G. Gayle, 2013. "On the Efficiency of Codeshare Contracts between Airlines: Is Double Marginalization Eliminated?," American Economic Journal: Microeconomics, American Economic Association, vol. 5(4), pages 244-273, November.
    21. Yuk‐fai Fong & Qihong Liu, 2011. "Loyalty Rewards Facilitate Tacit Collusion," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 20(3), pages 739-775, September.
    22. 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.
    23. Diego Escobari, 2011. "Frequent flyer programs premium and the role of airport dominance," Applied Economics Letters, Taylor & Francis Journals, vol. 18(16), pages 1565-1569.
    24. Byung-Do Kim & Mengze Shi & Kannan Srinivasan, 2001. "Reward Programs and Tacit Collusion," Marketing Science, INFORMS, vol. 20(2), pages 99-120, June.
    25. Connan Snider & Jonathan W. Williams, 2015. "Barriers to Entry in the Airline Industry: A Multidimensional Regression-Discontinuity Analysis of AIR-21," The Review of Economics and Statistics, MIT Press, vol. 97(5), pages 1002-1022, December.
    26. Caminal, Ramon & Claici, Adina, 2007. "Are loyalty-rewarding pricing schemes anti-competitive?," International Journal of Industrial Organization, Elsevier, vol. 25(4), pages 657-674, August.
    27. Gayle, Philip G. & Xie, Xin, 2019. "Firms’ markup, cost, and price changes when policymakers permit collusion: Does antitrust immunity matter?," Journal of Economic Behavior & Organization, Elsevier, vol. 157(C), pages 680-707.
    28. 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.
    29. Brueckner, Jan K. & Lee, Darin & Singer, Ethan S., 2013. "Airline competition and domestic US airfares: A comprehensivereappraisal," Economics of Transportation, Elsevier, vol. 2(1), pages 1-17.
    30. Severin Borenstein, 1989. "Hubs and High Fares: Dominance and Market Power in the U.S. Airline Industry," RAND Journal of Economics, The RAND Corporation, vol. 20(3), pages 344-365, Autumn.
    31. Alexander Luttmann & Cody Nehiba, 2020. "The Effects of Employee Hours‐of‐Service Regulations on the U.S. Airline Industry," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 39(4), pages 1043-1075, September.
    32. Volodymyr Bilotkach & Vivek Pai, 2016. "Hubs versus Airport Dominance," Transportation Science, INFORMS, vol. 50(1), pages 166-179, February.
    33. Borenstein, Severin & Rose, Nancy L, 1994. "Competition and Price Dispersion in the U.S. Airline Industry," Journal of Political Economy, University of Chicago Press, vol. 102(4), pages 653-683, August.
    34. Leonardo J. Basso & Matthew T. Clements & Thomas W. Ross, 2009. "Moral Hazard and Customer Loyalty Programs," American Economic Journal: Microeconomics, American Economic Association, vol. 1(1), pages 101-123, February.
    35. de Jong, Gerben & Behrens, Christiaan & van Ommeren, Jos, 2019. "Airline loyalty (programs) across borders: A geographic discontinuity approach," International Journal of Industrial Organization, Elsevier, vol. 62(C), pages 251-272.
    36. Ciliberto, Federico & Watkins, Eddie & Williams, Jonathan W., 2019. "Collusive pricing patterns in the US airline industry," International Journal of Industrial Organization, Elsevier, vol. 62(C), pages 136-157.
    37. W. Whalen, 2007. "A panel data analysis of code-sharing, antitrust immunity, and open skies treaties in international aviation markets," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 30(1), pages 39-61, February.
    38. Robert J CalzarettaJr. & Yair Eilat & Mark A Israel, 2017. "Competitive Effects Of International Airline Cooperation," Journal of Competition Law and Economics, Oxford University Press, vol. 13(3), pages 501-548.
    39. Robert D. Cairns & John W. Galbraith, 1990. "Artificial Compatibility, Barriers to Entry, and Frequent-Flyer Programs," Canadian Journal of Economics, Canadian Economics Association, vol. 23(4), pages 807-816, November.
    40. Mara Lederman, 2008. "Are Frequent‐Flyer Programs a Cause of the “Hub Premium”?," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 17(1), pages 35-66, March.
    41. Kerry M. Tan, 2016. "Incumbent Response to Entry by Low‐Cost Carriers in the U.S. Airline Industry," Southern Economic Journal, John Wiley & Sons, vol. 82(3), pages 874-892, January.
    42. Mian Dai & Qihong Liu & Konstantinos Serfes, 2014. "Is the Effect of Competition on Price Dispersion Nonmonotonic? Evidence from the U.S. Airline Industry," The Review of Economics and Statistics, MIT Press, vol. 96(1), pages 161-170, March.
    43. repec:wly:soecon:v:82:3:y:2016:p:874-892 is not listed on IDEAS
    44. Steven A. Morrison, 2001. "Actual, Adjacent, and Potential Competition Estimating the Full Effect of Southwest Airlines," Journal of Transport Economics and Policy, University of Bath, vol. 35(2), pages 239-256, May.
    45. Kristopher S. Gerardi & Adam Hale Shapiro, 2009. "Does Competition Reduce Price Dispersion? New Evidence from the Airline Industry," Journal of Political Economy, University of Chicago Press, vol. 117(1), pages 1-37, February.
    46. Lei He & Myongjin Kim & Qihong Liu, 2022. "Competitive response to unbundled services: An empirical look at Spirit Airlines," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 31(1), pages 115-145, February.
    47. Darin Lee & Maria José Luengo‐Prado, 2005. "The Impact of Passenger Mix on Reported “Hub Premiums” in the U.S. Airline Industry," Southern Economic Journal, John Wiley & Sons, vol. 72(2), pages 372-394, October.
    48. Jan K. Brueckner & Darin N. Lee & Ethan S. Singer, 2011. "Alliances, Codesharing, Antitrust Immunity, And International Airfares: Do Previous Patterns Persist?," Journal of Competition Law and Economics, Oxford University Press, vol. 7(3), pages 573-602.
    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. de Jong, Gerben & Behrens, Christiaan & van Ommeren, Jos, 2019. "Airline loyalty (programs) across borders: A geographic discontinuity approach," International Journal of Industrial Organization, Elsevier, vol. 62(C), pages 251-272.
    2. Luttmann, Alexander & Gaggero, Alberto A, 2020. "Purchase discounts and travel premiums during holiday periods: Evidence from the airline industry," MPRA Paper 104863, University Library of Munich, Germany.
    3. Azar, José & Schmalz, Martin & Tecu, Isabel, 2017. "Anti-Competitive Effects of Common Ownership," IESE Research Papers D/1169, IESE Business School.
    4. Menezes Bezerra Sampaio, Raquel & Urdanoz, Miguel, 2022. "Airlines' cooperation in the US domestic market: Measuring the evolution of price gaps," Transportation Research Part A: Policy and Practice, Elsevier, vol. 166(C), pages 424-443.
    5. Ma, Wenliang & Wang, Qiang & Yang, Hangjun & Zhang, Guoquan & Zhang, Yahua, 2020. "Understanding airline price dispersion in the presence of high-speed rail," Transport Policy, Elsevier, vol. 95(C), pages 93-102.
    6. Ivaldi, Marc & Petrova, Milena & Urdanoz, Miguel, 2022. "Airline cooperation effects on airfare distribution: An auction-model-based approach," Transport Policy, Elsevier, vol. 115(C), pages 239-250.
    7. Fukui, Hideki, 2019. "How do slot restrictions affect airfares? New evidence from the US airline industry," Economics of Transportation, Elsevier, vol. 17(C), pages 51-71.
    8. Gaggero, Alberto A. & Luttmann, Alexander, 2023. "The determinants of hidden-city ticketing: Competition, hub-and-spoke networks, and advance-purchase requirements," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 173(C).
    9. Myongjin Kim & Qihong Liu & Nicholas G. Rupp, 2023. "When Do Firms Offer Higher Product Quality? Evidence from the Allocation of Inflight Amenities," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 62(2), pages 149-177, March.
    10. Fiore, Alexander & Zanzalari, Danielle, 2023. "The competitive effects of product unbundling: Evidence from U.S. airlines," Journal of Air Transport Management, Elsevier, vol. 112(C).
    11. Philip G. Gayle & Xin Xie, 2018. "Entry Deterrence And Strategic Alliances," Economic Inquiry, Western Economic Association International, vol. 56(3), pages 1898-1924, July.
    12. Gayle, Philip G. & Xie, Xin, 2019. "Firms’ markup, cost, and price changes when policymakers permit collusion: Does antitrust immunity matter?," Journal of Economic Behavior & Organization, Elsevier, vol. 157(C), pages 680-707.
    13. Philip G. Gayle & Ying Lin, 2021. "Cost Pass‐Through In Commercial Aviation: Theory And Evidence," Economic Inquiry, Western Economic Association International, vol. 59(2), pages 803-828, April.
    14. Donggeun Kim & Myongjin Kim & Kerry Tan, 2021. "Tacit collusion and price dispersion in the presence of Southwest Airlines," Southern Economic Journal, John Wiley & Sons, vol. 88(1), pages 3-32, July.
    15. Bet, Germán, 2021. "Product specification under a threat of entry: Evidence from Airlines’ departure times," International Journal of Industrial Organization, Elsevier, vol. 75(C).
    16. Mantin, Benny & Rubin, Eran, 2018. "Price volatility and market performance measures: The case of revenue managed goods," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 120(C), pages 35-50.
    17. Ramon Caminal, 2012. "The Design and Efficiency of Loyalty Rewards," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 21(2), pages 339-371, June.
    18. Kang Hua Cao & Betty Krier & Chia-Mei Liu & Brian McNamara & Jerrod Sharpe, 2017. "The Nonlinear Effects of Market Structure on Service Quality: Evidence from the U.S. Airline Industry," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 51(1), pages 43-73, August.
    19. Kerry M. Tan, 2018. "Outsourcing and Price Competition: An Empirical Analysis of the Partnerships Between Legacy Carriers and Regional Airlines," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 53(2), pages 275-294, September.
    20. Ramon Caminal, 2022. "Time‐Limited Loyalty Rewards," Journal of Industrial Economics, Wiley Blackwell, vol. 70(4), pages 962-998, December.

    More about this item

    Keywords

    Airlines; competition; loyalty rewards; frequent flyer tickets; product quality;
    All these keywords.

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • L93 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Air Transportation
    • M31 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Marketing
    • R40 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Transportation Economics - - - General
    • R49 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Transportation Economics - - - Other

    NEP fields

    This paper has been announced in the following NEP Reports:

    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:pra:mprapa:119214. 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: Joachim Winter (email available below). General contact details of provider: https://edirc.repec.org/data/vfmunde.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.