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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

Suggested Citation

  • Philip G. Gayle, 2004. "Does Price Matter? Price and Non-price Competition in the Airline Industry," Econometric Society 2004 North American Summer Meetings 163, Econometric Society.
  • Handle: RePEc:ecm:nasm04:163
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    File URL: http://www-personal.ksu.edu/~gaylep/comp.pdf
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    References listed on IDEAS

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    4. Jerry Hausman & Gregory Leonard & J. Douglas Zona, 1994. "Competitive Analysis with Differentiated Products," Annals of Economics and Statistics, GENES, issue 34, pages 143-157.
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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, vol. 2(3), pages 1-43, August.

    More about this item

    Keywords

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

    JEL classification:

    • L93 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Air Transportation
    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • C2 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables

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