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Airline choice, switching costs and frequent flyer programmes

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  • Fredrik Carlsson
  • Åsa Lofgren

Abstract

Switching costs are costs that customers face when switching from one firm to another. In markets such as the airline market where repeated purchases are common, switching costs may be substantial. In this paper, the switching costs are estimated for domestic airline routes in Sweden between 1992 and 2002. In addition, the determinants of these switching costs are tested for; in particular, to what extent factors such as frequent flyer programmes and flag carriers have an effect on switching costs. A substantial switching cost is found. Although a large part of this calculated switching cost can be attributed to perceived quality differences, it is also found that frequent flyer programmes contribute a non-negligible part of the switching cost. The paper ends with a brief discussion on the welfare consequences of switching costs, where the connection between habit formation and switching costs is discussed.

Suggested Citation

  • Fredrik Carlsson & Åsa Lofgren, 2006. "Airline choice, switching costs and frequent flyer programmes," Applied Economics, Taylor & Francis Journals, vol. 38(13), pages 1469-1475.
  • Handle: RePEc:taf:applec:v:38:y:2006:i:13:p:1469-1475
    DOI: 10.1080/00036840500419608
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    References listed on IDEAS

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    1. Paul Klemperer, 1995. "Competition when Consumers have Switching Costs: An Overview with Applications to Industrial Organization, Macroeconomics, and International Trade," Review of Economic Studies, Oxford University Press, vol. 62(4), pages 515-539.
    2. Raquel Carrasco & José M. Labeaga & J. David López-Salido, 2005. "Consumption and Habits: Evidence from Panel Data," Economic Journal, Royal Economic Society, vol. 115(500), pages 144-165, January.
    3. Proussaloglou, Kimon & Koppelman, Frank S., 1999. "The choice of air carrier, flight, and fare class," Journal of Air Transport Management, Elsevier, vol. 5(4), pages 193-201.
    4. Joseph Farrell & Carl Shapiro, 1988. "Dynamic Competition with Switching Costs," RAND Journal of Economics, The RAND Corporation, vol. 19(1), pages 123-137, Spring.
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    6. Matthew Rabin, 1998. "Psychology and Economics," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 11-46, March.
    7. 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.
    8. Löfgren, Åsa, 2003. "The Effect of Addiction on Environmental Taxation in a First and Second-best world," Working Papers in Economics 91, University of Gothenburg, Department of Economics.
    9. Moshe Kim & Doron Kliger & Bent Vale, 2001. "Estimating Switching Costs and Oligopolistic Behavior," Center for Financial Institutions Working Papers 01-13, Wharton School Center for Financial Institutions, University of Pennsylvania.
    10. 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.
    11. Beggs, Alan W & Klemperer, Paul, 1992. "Multi-period Competition with Switching Costs," Econometrica, Econometric Society, vol. 60(3), pages 651-666, May.
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    Citations

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    Cited by:

    1. Johan Lundberg & Sofia Lundberg, 2010. "Retailer choice and loyalty schemes—evidence from Sweden," Letters in Spatial and Resource Sciences, Springer, vol. 3(3), pages 137-146, October.
    2. Martín, Juan Carlos & Román, Concepción & Espino, Raquel, 2011. "Evaluating frequent flyer programs from the air passengers' perspective," Journal of Air Transport Management, Elsevier, vol. 17(6), pages 364-368.
    3. Paha, Johannes & Rompf, Dirk & Warnecke, Christiane, 2013. "Customer choice patterns in passenger rail competition," Transportation Research Part A: Policy and Practice, Elsevier, vol. 50(C), pages 209-227.
    4. Jorge Tarziján M, 2005. "Evaluación de la Autorización de Planes de Precio por Permanencia a las AFP," Working Papers 10, Superintendencia de Pensiones, revised Aug 2005.
    5. 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.
    6. Fröidh, Oskar & Byström, Camilla, 2013. "Competition on the tracks – Passengers’ response to deregulation of interregional rail services," Transportation Research Part A: Policy and Practice, Elsevier, vol. 56(C), pages 1-10.
    7. Ek, Kristina & Söderholm, Patrik, 2008. "Households' switching behavior between electricity suppliers in Sweden," Utilities Policy, Elsevier, vol. 16(4), pages 254-261, December.
    8. Jens Metge, 2007. "Protecting the Domestic Market: Industrial Policy and Strategic Firm Behaviour," Discussion Paper Series dp467, The Federmann Center for the Study of Rationality, the Hebrew University, Jerusalem.
    9. de Boer, Evert R. & Gudmundsson, Sveinn Vidar, 2012. "30 years of frequent flyer programs," Journal of Air Transport Management, Elsevier, vol. 24(C), pages 18-24.
    10. repec:bla:manchs:v:85:y:2017:i:4:p:491-510 is not listed on IDEAS

    More about this item

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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