Accounting for Price Endogeneity in Airline Itinerary Choice Models: An Application to Continental U.S. Markets

38 Pages Posted: 26 Jan 2016  

Virginie Lurkin

University of Liege - HEC Management School

Laurie A. Garrow

Georgia Institute of Technology

Matthew John Higgins

Georgia Institute of Technology & NBER; National Bureau of Economic Research (NBER)

Jeffrey P. Newman

Georgia Institute of Technology

M. Schyns

University of Liege - HEC Management School

Multiple version iconThere are 3 versions of this paper

Date Written: January 25, 2016

Abstract

Network planning models, which forecast the profitability of airline schedules, support many critical decisions, including equipment purchase decisions. Network planning models include an itinerary choice model which is used to allocate air total demand in a city pair to different itineraries. Multinomial logit (MNL) models are commonly used in practice and capture how individuals make trade-offs among different itinerary attributes; however, none that we are aware of account for price endogeneity. This study formulates an itinerary choice model that is consistent with those used by industry and corrects for price endogeneity using a control function that uses several types of instrumental variables. We estimate our models using database of more than 3 million tickets provided by the Airlines Reporting Corporation. Results based on Continental U.S. markets for May 2013 departures show that models that fail to account for price endogeneity overestimate customers’ value of time and result in biased price estimates and incorrect pricing recommendations. The size and comprehensiveness of our database allows us to estimate highly refined departure time of day preference curves that account for distance, direction of travel, the number of time zones traversed, departure day of week and itinerary type (outbound, inbound or one-way). These time of day preference curves can be used by airlines, researchers, and government organizations in the evaluation of different policies such as congestion pricing.

Keywords: air travel behavior, itinerary choice, price elasticity, price endogeneity, time of day preference

JEL Classification: C13, C25, C35

Suggested Citation

Lurkin, Virginie and Garrow, Laurie A. and Higgins, Matthew John and Newman, Jeffrey P. and Schyns, Michael, Accounting for Price Endogeneity in Airline Itinerary Choice Models: An Application to Continental U.S. Markets (January 25, 2016). Available at SSRN: https://ssrn.com/abstract=2721901 or http://dx.doi.org/10.2139/ssrn.2721901

Virginie Lurkin

University of Liege - HEC Management School ( email )

Boulevard du Rectorat 7 (B31)
LIEGE, Liege 4000
Belgium

Laurie A. Garrow (Contact Author)

Georgia Institute of Technology ( email )

Atlanta, GA 30332
United States
404-385-6634 (Phone)

HOME PAGE: http://garrowlab.ce.gatech.edu

Matthew John Higgins

Georgia Institute of Technology & NBER ( email )

800 West Peachtree Street
Atlanta, GA 30308
United States
404-894-4368 (Phone)
404-894-6030 (Fax)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Jeffrey P. Newman

Georgia Institute of Technology ( email )

Atlanta, GA 30332
United States

Michael Schyns

University of Liege - HEC Management School ( email )

Boulevard du Rectorat 7 (B31)
LIEGE, Liege 4000
Belgium

HOME PAGE: http://www.sig.hec.ulg.ac.be

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