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

Luttmann, Alexander and Ladd, Daniel (2023): Loyalty rewards and redemption behavior: Stylized facts for the U.S. airline industry.

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: Airlines, competition, loyalty rewards, frequent flyer tickets, product quality
• Subjects: L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L11 - Production, Pricing, and Market Structure ; Size Distribution of Firms; L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L13 - Oligopoly and Other Imperfect Markets; L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L14 - Transactional Relationships ; Contracts and Reputation ; Networks; L - Industrial Organization > L9 - Industry Studies: Transportation and Utilities > L93 - Air Transportation; M - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M3 - Marketing and Advertising > M31 - Marketing; R - Urban, Rural, Regional, Real Estate, and Transportation Economics > R4 - Transportation Economics > R40 - General; R - Urban, Rural, Regional, Real Estate, and Transportation Economics > R4 - Transportation Economics > R49 - Other

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