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The Entry of Low-Cost Airlines: Price Competition in the European Airline Market

Author

Listed:
  • Marco Alderighi

    (CERTeT - Bocconi University, Milan)

  • Alessandro Cento

    (KLM Royal Dutch Airlines, Revenue Management Dept, Milan)

  • Peter Nijkamp

    (Faculty of Economics and Business Administration, Vrije Universiteit Amsterdam)

  • Piet Rietveld

    (Faculty of Economics and Business Administration, Vrije Universiteit Amsterdam)

Abstract
This paper investigates the response of full service carriers (FSCs) to theentry of low-cost carriers (LCCs). We develop a model of airlinecompetition, which accommodates various market structures, some ofwhich include low-cost players. Using data on published airfares ofLufthansa, British Airways, Alitalia and KLM for the main city-pairs fromItaly to the rest of Europe, our statistical modelling resu1ts confirm theconclusions of the theoretical model. Competition among FSCs appears toaffect the price levels of business and leisure segments asymmetrically. Incontrast, competition with LCCs reduces the fares of FSCs in all classesproportionally.

Suggested Citation

  • Marco Alderighi & Alessandro Cento & Peter Nijkamp & Piet Rietveld, 2004. "The Entry of Low-Cost Airlines: Price Competition in the European Airline Market," Tinbergen Institute Discussion Papers 04-074/3, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:20040074
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    File URL: https://papers.tinbergen.nl/04074.pdf
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    Citations

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    Cited by:

    1. Angela Stefania Bergantino & Claudia Capozza, 2015. "Airline Pricing Behavior Under Limited Inter‐Modal Competition," Economic Inquiry, Western Economic Association International, vol. 53(1), pages 700-713, January.
    2. Murakami, Hideki & Amano, Yoshihisa & Asahi, Ryota, 2015. "Dynamic effect of inter-firm rivalry on airfares: Case of Japan's full-service and new air carriers," Journal of Air Transport Management, Elsevier, vol. 44, pages 25-33.
    3. Ng, Kam To & Fu, Xiaowen & Hanaoka, Shinya & Oum, Tae Hoon, 2022. "Japanese aviation market performance during the COVID-19 pandemic - Analyzing airline yield and competition in the domestic market," Transport Policy, Elsevier, vol. 116(C), pages 237-247.
    4. Ivana Tománková, . "Determinants of Route Presence in the EU Airline Industry," Prague Economic Papers, University of Economics, Prague, vol. 0, pages 1-13.
    5. Hideki Murakami, 2010. "Time Effect of Low-Cost Carrier Entry and Social Welfare in US Large Air Markets," Discussion Papers 2010-31, Kobe University, Graduate School of Business Administration.
    6. Ng, Kam To & Fu, Xiaowen & Lee, Jaewoon & Yamaguchi, Katsuhiro & Zhu, Chuanyan, 2023. "The Effects of Bankruptcy on Airline Yield and Frequency: The case of the duopolistic domestic market in Japan," Transport Policy, Elsevier, vol. 142(C), pages 28-36.
    7. Asahi, Ryota & Murakami, Hideki, 2017. "Effects of Southwest Airlines' entry and airport dominance," Journal of Air Transport Management, Elsevier, vol. 64(PA), pages 86-90.
    8. Hideki Murakami & Yoshihisa Amano, 2013. "Dynamic effect of inter-airline rivalry on airfares and consumers' welfare: Japan' s full-service vs. new air carriers," Discussion Papers 2013-31, Kobe University, Graduate School of Business Administration.
    9. Ivana Tománková, 2017. "Determinants of Route Presence in the EU Airline Industry," Prague Economic Papers, Prague University of Economics and Business, vol. 2017(1), pages 90-102.
    10. David Edward Pitfield, 2004. "Airline Price Competition: A Time Series Analysis of 'Low-Cost' Carriers," ERSA conference papers ersa04p680, European Regional Science Association.
    11. Ren, Junqiushi, 2020. "Fare impacts of Southwest Airlines: A comparison of nonstop and connecting flights," Journal of Air Transport Management, Elsevier, vol. 84(C).
    12. Avogadro, Nicolò & Malighetti, Paolo & Redondi, Renato & Salanti, Andrea, 2021. "A tale of airline competition: When full-service carriers undercut low-cost carriers fares," Journal of Air Transport Management, Elsevier, vol. 92(C).
    13. Chen, Jihui & Wang, Yi, 2021. "The pricing effects of entry by Hainan airlines: Evidence from the U.S.-China international air travel market," Journal of Economics and Business, Elsevier, vol. 114(C).

    More about this item

    Keywords

    Pricing strategies; yield management; low-cost carriers; European airline market;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • L93 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Air Transportation

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