Price Competition in Air Transport Market, Some Empirical Evidences



Price Competition in Air Transport Market, Some Empirical Evidences

Authors

Latge-Roucolle Chantal, ENAC - French National School of Civil Aviation, Karimi Shervin, ENAC

Description

Using French data on transatlantic routes, we estimate the direct effect of price competition on the prices of a particular airline.

Abstract

Empirical studies related to air transport market show that airlines price discriminate when they are in a monopoly situation (Gale and Holmes, 1993). This is consistent with economic theory. Some empirical literature related to airline pricing shows however that airlines practice price discrimination even though they have limited monopoly market power (Dana 1998). Stavins (2001) shows that market concentration leads to a reduction in discount granted to tickets with restrictions, when those restrictions are used as discriminatory tools. The theory related to price discrimination is then controversial in air transport markets: price discrimination does not necessarily increase as the markets become more competitive.
Beyond discrimination process, the pricing policy of an airline is based on revenue management. That is, the portfolio of prices supplied to customers varies according to revenue management imperative. In terms of revenue management, many European airlines use the Revenue Management System provided by Amadeus. The optimization process, basis of the RMS, uses only historical data of the company to maximise the revenue on each flight. It results in opening or closing classes during the life time of the flight booking, taking into account the load factor and the level of demand. During this optimisation process the competitive pressure exerted by airlines on the same route is never addressed. As a consequence, RM analysts daily observe competitive prices and adapt the pricing of their company. This leads to a sound homogenisation of airlines pricing strategies while competing on the market. This observation is contradictory with Netessine and Shumsky (2004) and Lua (2006) results. Netessine and Shumsky (2004) and Lua (2006) suggest that airlines should differentiate their strategies in order to maximize their revenue on a flight.
Using French data on transatlantic routes, we estimate the direct effect of competition on the daily prices supplied by a selected airline. We focus our analysis on economy tickets in order to simplify this preliminary analysis. We find a statistical significant dependence between reservation date and the level of prices. We also control for the route and the departure day. These variables appear to have a significant influence on the level of prices. Finally, the prices supplied on the same routes by competitors in the previous days are statistically significant. This confirms RM analysts’ behaviour, although the sense of competitors’ price effect depends on the competitor. Thus our results are not perfectly opposite to Netessine and Shumsky (2004) and Lua (2006) findings. The next step of our analysis will consist in using a system of price equations, each of them corresponding to an airline, to better identify and assess the interactions between airlines. Then the global system of competition in price on the market into consideration will be analysed.

Publisher

Association for European Transport