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Are Frequent-Flyer Programs a Cause of the "Hub Premium"?

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  • Mara Lederman

Abstract

"This paper estimates the relationship between frequent-flyer programs (FFPs) and fares at hub airports. I exploit the formation of partnerships that allowed members of one airline's FFP to earn that airline's points on flights operated by its partner. If FFPs allow an airline to charge higher fares on routes that depart from its hubs, these partnerships should allow an airline's partner to charge higher fares on routes that depart from these same airports. I find that offering the FFP points of the dominant carrier at an airport does, indeed, lead to higher fares. Combining these estimates with estimates of the "hub premium" suggests that FFPs may account for at least 25% of the "hub premium."" Copyright 2008 Blackwell Publishing.

Suggested Citation

  • 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.
  • Handle: RePEc:bla:jemstr:v:17:y:2008:i:1:p:35-66
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    References listed on IDEAS

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    1. Daniel F. Spulber, 1996. "Market Microstructure and Intermediation," Journal of Economic Perspectives, American Economic Association, vol. 10(3), pages 135-152, Summer.
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    Cited by:

    1. Ramon Caminal, 2012. "The Design and Efficiency of Loyalty Rewards," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 21(2), pages 339-371, June.
    2. Alderighi, Marco & Gaggero, Alberto A. & Piga, Claudio A., 2015. "The effect of code-share agreements on the temporal profile of airline fares," Transportation Research Part A: Policy and Practice, Elsevier, vol. 79(C), pages 42-54.
    3. Ramon Caminal, 2009. "The design and efficiency of loyalty rewards," Working Papers 408, Barcelona Graduate School of Economics.
    4. Israel Mark & Keating Bryan & Rubinfeld Daniel L. & Willig Bobby, 2013. "Airline Network Effects and Consumer Welfare," Review of Network Economics, De Gruyter, vol. 12(3), pages 287-322, November.
    5. G. de Jong & C.L. Behrens & H. van Herk & E.T. Verhoef, 2017. "Domestic Market Power in the International Airline Industry," Tinbergen Institute Discussion Papers 17-009/VIII, Tinbergen Institute.
    6. Severin Borenstein, 2011. "Why Can't US Airlines Make Money?," American Economic Review, American Economic Association, vol. 101(3), pages 233-237, May.
    7. Castillo-Manzano, José I. & López-Valpuesta, Lourdes, 2014. "Living “up in the air†: Meeting the frequent flyer passenger," Journal of Air Transport Management, Elsevier, vol. 40(C), pages 48-55.
    8. Joshua S. Gans & Avi Goldfarb & Mara Lederman, 2017. "Exit, Tweets and Loyalty," NBER Working Papers 23046, National Bureau of Economic Research, Inc.
    9. Bilotkach, Volodymyr & Lakew, Paulos Ashebir, 2014. "On sources of market power in the airline industry: Panel data evidence from the US airports," Transportation Research Part A: Policy and Practice, Elsevier, vol. 59(C), pages 288-305.
    10. Benjamin Dachis, 2014. "Full Throttle: Reforming Canada's Aviation Policy," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 398, January.
    11. Laurent Callot & Johannes Tang Kristensen, 2014. "Vector Autoregressions with parsimoniously Time Varying Parameters and an Application to Monetary Policy," Tinbergen Institute Discussion Papers 14-145/III, Tinbergen Institute, revised 09 Apr 2015.
    12. Bar, Michael & Chernomaz, Kirill & Diego, Escobari, 2010. "Pricing and travelers' decision to use frequent flyer miles: evidence from the U.S. airline industry," MPRA Paper 32201, University Library of Munich, Germany.
    13. Aguirregabiria, Victor & Ho, Chun-Yu, 2012. "A dynamic oligopoly game of the US airline industry: Estimation and policy experiments," Journal of Econometrics, Elsevier, vol. 168(1), pages 156-173.
    14. repec:eee:jaitra:v:64:y:2017:i:pa:p:55-59 is not listed on IDEAS
    15. Christiaan Behrens & Nathalie McCaughey, 2015. "Loyalty Programs and Consumer Behaviour: The Impact of FFPs on Consumer Surplus," Tinbergen Institute Discussion Papers 15-048/VIII, Tinbergen Institute.
    16. Ciliberto, Federico & Williams, Jonathan, 2010. "Does Multimarket Contact Facilitate Tacit Collusion? Inference on Conjectural Parameters in the Airline Industry," MPRA Paper 24888, University Library of Munich, Germany.
    17. Agostini, Claudio A. & Inostroza, Diego & Willington, Manuel, 2015. "Price effects of airlines frequent flyer programs: The case of the dominant firm in Chile," Transportation Research Part A: Policy and Practice, Elsevier, vol. 78(C), pages 283-297.
    18. 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.
    19. Tan, Kerry M. & Samuel, Andrew, 2016. "The effect of de-hubbing on airfares," Journal of Air Transport Management, Elsevier, vol. 50(C), pages 45-52.
    20. Fu, Xiaowen & Homsombat, Winai & Oum, Tae H., 2011. "Airport–airline vertical relationships, their effects and regulatory policy implications," Journal of Air Transport Management, Elsevier, vol. 17(6), pages 347-353.

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