“Service-quality and pricing strategies in the airline industry: The role of distance” (joint with Xavier Fageda)
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Abstract: This paper proposes a theoretical setup along with an empirical application related to the airline industry to analyze carriers' service quality and pricing decisions. These decisions depend crucially on route distance, as only short-haul routes are affected by intermodal competition. This additional source of competition on short-haul routes explains the positive effect of distance on flight frequencies, as airlines can attract more demand and boost profits by increasing service quality. Fares also follow the same pattern because longer routes are more costly to operate, but also because a higher service quality entails a certain "product upgrade" that translates into a higher passenger willingness to pay. Finally, the intensity of these effects differs between network and low-cost carriers, yielding an increased differentiation between them as the route distance rises. However, intermodal competition on short-haul routes affects more intensively network carriers than low-cost carriers, thereby acting as a brake on this observed differentiation.
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