Demand Shocks, Airline Pricing, and High-Speed Rail Substitution: Evidence from the Chinese Market

37 Pages Posted: 6 Sep 2017 Last revised: 7 Sep 2017

See all articles by Feng Wei

Feng Wei

Sichuan Agricultural University - School of Economics

Jihui Chen

Illinois State University

Lan Zhang

Southwestern University of Finance and Economics (SWUFE)

Date Written: September 1, 2017

Abstract

We study the high-speed rail (HSR) substitution for air travel through the demand shocks triggered by two HSR events: the launch of Beijing-Shanghai high-speed rails (the “Jing-hu” HSRs) and the Wenzhou train accident. One novelty of our data is that the HSR events are exogenous to the airline industry, alleviating the common endogeneity concern. Using a difference-in-difference approach, we find some evidence of substitution based on the pattern of airfare adjustments during the sample period. Specifically, compared to those in the control group, mean airfares for routes along the Jing-hu HSRs decline by 30.4 per cent upon the launch, but rebound by 27.4 per cent following the accident. Furthermore, the two events have a larger impact on low-cost carriers (LCCs) and regional airlines, on tourism routes, and on flights that depart during evening hours than their counterparts, respectively. Thus, we claim that the HSRs mainly serve as a low-end substitution for air travel in China.

Suggested Citation

Wei, Feng and Chen, Jihui and Zhang, Lan, Demand Shocks, Airline Pricing, and High-Speed Rail Substitution: Evidence from the Chinese Market (September 1, 2017). Available at SSRN: https://ssrn.com/abstract=3030930 or http://dx.doi.org/10.2139/ssrn.3030930

Feng Wei

Sichuan Agricultural University - School of Economics ( email )

Huiming Road No112, Wenjiang district
Chengdu, SIchuan 610000
China

Jihui Chen (Contact Author)

Illinois State University ( email )

Campus Box 4200
Economics Department
Normal, IL 61790-4200
United States

HOME PAGE: http://https://about.illinoisstate.edu/jchen4/pages/default.aspx

Lan Zhang

Southwestern University of Finance and Economics (SWUFE) ( email )

55 Guanghuacun St,
Chengdu, Sichuan 610074
China

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