Air Ticket Sales as Bids from Airline Alliances

33 Pages Posted: 2 Feb 2015

See all articles by Marc Ivaldi

Marc Ivaldi

Toulouse School of Economics; Centre for Economic Policy Research (CEPR)

Milena T. Petrova

Bocconi University

Miguel Urdanoz

University of Toulouse 1 - Toulouse School of Economics (TSE)

Date Written: February 2015

Abstract

Motivated by the higher price sensitivity and service homogenisation in the airline industry in recent years, we propose a new methodology to deal with transaction prices and to estimate the effect of alliances in the US domestic market. The assumption that airlines compete on price allows us to take advantage of the observational equivalence between Bertrand competition and the reverse English auction. We then apply an MLE method, developed by Paarsch (1997) for estimating auctions, to recover the distributional characteristics of air fares using a sample of airline tickets from the US domestic market. This procedure allows us to benefit from the heterogeneity of individual prices while most studies have used average prices, which would have involved a loss of information and a potential bias. We find that an alliance operating in a market is associated with prices on average 18.9 percent higher. Additionally, we find the standard deviation of ticket prices to be 4.3 percent higher, which is likely related to more efficient revenue management practice by alliance partners operating together in the same market.

Keywords: airfares, airlines, alliances

JEL Classification: L40, L93, R48

Suggested Citation

Ivaldi, Marc and Petrova, Milena T. and Urdanoz, Miguel, Air Ticket Sales as Bids from Airline Alliances (February 2015). CEPR Discussion Paper No. DP10384, Available at SSRN: https://ssrn.com/abstract=2559325

Marc Ivaldi (Contact Author)

Toulouse School of Economics ( email )

Manufacture des Tabacs
21 Allee de Brienne bat. F
Toulouse Cedex, F-31000
France
+33 5 61 12 8592 (Phone)
+33 5 61 12 8637 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Milena T. Petrova

Bocconi University ( email )

Via Sarfatti, 25
Milan, MI 20136
Italy

Miguel Urdanoz

University of Toulouse 1 - Toulouse School of Economics (TSE) ( email )

Place Anatole-France
Toulouse Cedex, F-31042
France

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