Working Paper: CEPR ID: DP10384
Authors: Marc Ivaldi; Milena Petrova; Miguel Urdanoz
Abstract: Motivated by the higher price sensitivity and service homogenisation in the airline industry in recent years, we propose a new methodology to deal with transaction prices and to estimate the effect of alliances in the US domestic market. The assumption that airlines compete on price allows us to take advantage of the observational equivalence between Bertrand competition and the reverse English auction. We then apply an MLE method, developed by Paarsch (1997) for estimating auctions, to recover the distributional characteristics of air fares using a sample of airline tickets from the US domestic market. This procedure allows us to benefit from the heterogeneity of individual prices while most studies have used average prices, which would have involved a loss of information and a potential bias. We find that an alliance operating in a market is associated with prices on average 18.9 percent higher. Additionally, we find the standard deviation of ticket prices to be 4.3 percent higher, which is likely related to more effcient revenue management practice by alliance partners operating together in the same market.
Keywords: Airfares; Airlines; Alliances
JEL Codes: L40; L93; R48
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| presence of airline alliance in duopoly market (L93) | average increase in ticket prices (R48) |
| presence of airline alliance in duopoly market (L93) | increased variability in ticket pricing (D49) |
| distance (R12) | reservation costs (Q26) |
| distance (R12) | price variation (D46) |
| income at origin (F16) | mean reservation cost (D40) |
| income at destination (E25) | mean reservation cost (D40) |