Pricing and travelers' decision to use frequent flyer miles: evidence from the U.S. airline industry

Bar, Michael and Chernomaz, Kirill and Diego, Escobari (2010): Pricing and travelers' decision to use frequent flyer miles: evidence from the U.S. airline industry.

Abstract

Previous research on Frequent Flyer Programs (FFP) covered various topics, from analyzing the effect of international airline alliances on domestic travel demand to the effect of airport dominance and FFP on pricing. However, one important constraint in previous empirical research on FFP is the lack of a measure of these programs at a specific time-variant route and carrier level. In this chapter we use a novel way to measure the extent of FFP which allows us to analyze how these programs change from route to route, across carriers and over time. The dataset, that covers the quarters from 1993.1 to 2009.3, was constructed with data obtained from the Bureau of Transportation and Statistics and it has information on prices, proportion of frequent flyer tickets as well as various route and carrier variables. Using panel data techniques to control for unobservables along with the use of instrumental variables to control for potentially endogenous regressors, the results found are consistent with our economic model: travelers are more likely to redeem their frequent flyer miles in more expensive routes. Moreover, business travelers, who usually pay higher prices, were found to be less price sensitive than tourists when switching to buy with accumulated miles.

• Item Type: MPRA Paper
• Language: English
• Keywords: Frequent Flyer Programs; Airlines; Panel Data
• Subjects: L - Industrial Organization > L9 - Industry Studies: Transportation and Utilities > L93 - Air Transportation; L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L11 - Production, Pricing, and Market Structure ; Size Distribution of Firms; C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C23 - Panel Data Models ; Spatio-temporal Models

References

Bilotkach, V., 2009. Parallel Frequent Flier Program Partnerships: Impact on Frequency. Working Paper. University of California, Irvine.

Borenstein, S., 1989. Hubs and High Fares: Airport Dominance and Market Power in the U.S. Airline Industry, Rand Journal of Economics, 20, 344-365.

Borenstein, S. and N.L. Rose, 1994. Competition and Price Dispersion in the U.S. Airline Industry, Journal of Political Economy, 102, 653-683.

Cox, D., 1970. Analysis of Binary Data. London: Methuen.

Escobari, D., 2009. Systematic Peak-load Pricing, Congestion Premia and Demand Diverting: Empirical Evidence, Economics Letters, 103, 59-61.

Gerardi, K.S. and A.H. Shapiro, 2009. Does Competition Reduce Price Dispersion? New Evidence from the Airline Industry, Journal of Political Economy, 117, 1-37.

Lederman, M., 2007. Do Enhacements to Loyalty Programs Affect Demand? The Impact of International Frequent Flyer Partnerships on Domestic Airline Demand, Rand Journal of Economics, 38, 1134-1158.

Lederman, M., 2008. Are Frequent Flyer Programs a Cause of the `Hub Premium', Journal of Economics and Management Strategy, 17, 35-66.

Lee, D. and M.J. Luego Prado, 2005. The Impact of Passenger Mix on Reported Hub Premiums in the U.S. Airline Industry, Southern Economic Journal, 72, 372-394.

Mason, G. and N. Baker, 1996. Buy Now Fly Later: An Investigation of Airline Frequent Flyer Programs, Tourism Management, 17, 219-232.