Loyalty rewards and redemption behavior: Identifying frequent flyer tickets in the U.S. airline industry

Luttmann, Alexander and Ladd, Daniel (2023): Loyalty rewards and redemption behavior: Identifying frequent flyer tickets in the U.S. airline industry.

Abstract

This paper develops a novel method to identify frequent flyer award (FFA) tickets in the Airline Origin and Destination Survey, making award redemption directly identifiable in one of the most widely used datasets in empirical industrial organization. Using this method, we demonstrate that FFAs are more likely to be redeemed for seasonal and leisure travel, and disproportionately originate from airports where the ticketing carrier is dominant. Other observable differences between FFAs and paid tickets have declined from 2005–2019, indicating a potential shift in how FFAs are valued and/or redeemed. Further, routes with larger shares of FFA passengers exhibit higher levels of price dispersion, suggesting that airline loyalty programs may enhance market power by increasing an airline’s ability to price discriminate. Insights from airline reward behavior can help inform how loyalty programs across industries impact consumer welfare, market power, and firm behavior.

• 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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