IDEAS home Printed from https://ideas.repec.org/a/eee/transe/v98y2017icp151-170.html
   My bibliography  Save this article

Dynamic pricing and market segmentation responses to low-cost carrier entry

Author

Listed:
  • Varella, Rafael R.
  • Frazão, Jessica
  • Oliveira, Alessandro V.M.

Abstract

This paper develops an empirical model of online airfares to inspect the impact of the entry of a low-cost carrier (LCC). We utilize a database collected from the website of an online travel agent in Brazil. We test whether incumbents reshape their airfare temporal profiles in an attempt to attract the price-sensitive passengers who constitute the target market of the newcomer. Our results suggest that LCC entry partially spoils the existing market segmentation schemes of incumbents, forcing them to revise their distribution management strategy, simplify their fare structure and migrate from a non-monotonic to a weakly monotonic price curve.

Suggested Citation

  • Varella, Rafael R. & Frazão, Jessica & Oliveira, Alessandro V.M., 2017. "Dynamic pricing and market segmentation responses to low-cost carrier entry," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 98(C), pages 151-170.
    • Handle: RePEc:eee:transe:v:98:y:2017:i:c:p:151-170
    DOI: 10.1016/j.tre.2016.12.010
    as

    Download full text from publisher

    File URL: https://www.sciencedirect.com/science/article/pii/S1366554516306676
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.tre.2016.12.010?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Cristian Huse & Alessandro V. M. Oliveira, 2012. "Does Product Differentiation Soften Price Reactions to Entry? Evidence from the Airline Industry," Journal of Transport Economics and Policy, University of Bath, vol. 46(2), pages 189-204, May.
    2. Diego Escobari, 2012. "Dynamic Pricing, Advance Sales and Aggregate Demand Learning in Airlines," Journal of Industrial Economics, Wiley Blackwell, vol. 60(4), pages 697-724, December.
    3. Alderighi, Marco & Gaggero, Alberto A. & Piga, Claudio A., 2015. "The effect of code-share agreements on the temporal profile of airline fares," Transportation Research Part A: Policy and Practice, Elsevier, vol. 79(C), pages 42-54.
    4. 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.
    5. Austan Goolsbee & Chad Syverson, 2008. "How Do Incumbents Respond to the Threat of Entry? Evidence from the Major Airlines," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 123(4), pages 1611-1633.
    6. Diego Escobari & Li Gan, 2007. "Price Dispersion under Costly Capacity and Demand Uncertainty," NBER Working Papers 13075, National Bureau of Economic Research, Inc.
    7. Hofer, Christian & Windle, Robert J. & Dresner, Martin E., 2008. "Price premiums and low cost carrier competition," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 44(5), pages 864-882, September.
    8. Brueckner, Jan K. & Lee, Darin & Singer, Ethan S., 2013. "Airline competition and domestic US airfares: A comprehensivereappraisal," Economics of Transportation, Elsevier, vol. 2(1), pages 1-17.
    9. Bilotkach, Volodymyr & Gaggero, Alberto A. & Piga, Claudio A., 2015. "Airline pricing under different market conditions: Evidence from European Low-Cost Carriers," Tourism Management, Elsevier, vol. 47(C), pages 152-163.
    10. Alberto A. Gaggero & Claudio A. Piga, 2011. "Airline Market Power and Intertemporal Price Dispersion," Journal of Industrial Economics, Wiley Blackwell, vol. 59(4), pages 552-577, December.
    11. Volodymyr Bilotkach & Nicholas G. Rupp & Vivek Pai, 2013. "Value of a Platform to a Seller: Case of American Airlines and Online Travel Agencies," Working Papers 13-08, NET Institute.
    12. Hsu, Chia-Jui & Yen, Jin-Ru & Chang, Yu-Chun & Woon, Hui Kee, 2016. "How do the services of low cost carriers affect passengers' behavioral intentions to revisit a destination?," Journal of Air Transport Management, Elsevier, vol. 52(C), pages 111-116.
    13. Gaggero, Alberto A. & Piga, Claudio A., 2010. "Airline competition in the British Isles," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 46(2), pages 270-279, March.
    14. Oliveira, Alessandro V.M. & Huse, Cristian, 2009. "Localized competitive advantage and price reactions to entry: Full-service vs. low-cost airlines in recently liberalized emerging markets," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 45(2), pages 307-320, March.
    15. Marco Alderighi & Claudio A. Piga, 2010. "On-line Booking and Revenue Management: Evidence from a Low-Cost Airline," Review of Economic Analysis, Digital Initiatives at the University of Waterloo Library, vol. 2(3), pages 272-286, September.
    16. Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, vol. 63(4), pages 841-890, July.
    17. Bachis, Enrico & Piga, Claudio A., 2011. "Low-cost airlines and online price dispersion," International Journal of Industrial Organization, Elsevier, vol. 29(6), pages 655-667.
    18. Marco Alderighi & Marcella Nicolini & Claudio A. Piga, 2012. "Combined Effects of Load Factors and Booking Time on Fares: Insights from the Yield Management of a Low-Cost Airline," Working Papers 2012.14, Fondazione Eni Enrico Mattei.
    19. Windle, Robert & Dresner, Martin, 1999. "Competitive responses to low cost carrier entry," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 35(1), pages 59-75, March.
    20. Alamdari, Fariba & Mason, Keith, 2006. "The future of airline distribution," Journal of Air Transport Management, Elsevier, vol. 12(3), pages 122-134.
    21. Bendinelli, William E. & Bettini, Humberto F.A.J. & Oliveira, Alessandro V.M., 2016. "Airline delays, congestion internalization and non-price spillover effects of low cost carrier entry," Transportation Research Part A: Policy and Practice, Elsevier, vol. 85(C), pages 39-52.
    22. Evans, William N & Kessides, Ioannis N, 1993. "Localized Market Power in the U.S. Airline Industry," The Review of Economics and Statistics, MIT Press, vol. 75(1), pages 66-75, February.
    23. Steven A. Morrison, 2001. "Actual, Adjacent, and Potential Competition Estimating the Full Effect of Southwest Airlines," Journal of Transport Economics and Policy, University of Bath, vol. 35(2), pages 239-256, May.
    24. Mantin, Benny & Koo, Bonwoo, 2009. "Dynamic price dispersion in airline markets," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 45(6), pages 1020-1029, November.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Azadian, Farshid & Vasigh, Bijan, 2019. "The blurring lines between full-service network carriers and low-cost carriers: A financial perspective on business model convergence," Transport Policy, Elsevier, vol. 75(C), pages 19-26.
    2. Fukushi, Mitsuyoshi & Delgado, Felipe & Raveau, Sebastián & Santos, Bruno F., 2022. "CHAIRS: A choice-based air transport simulator applied to airline competition and revenue management," Transportation Research Part A: Policy and Practice, Elsevier, vol. 155(C), pages 297-315.
    3. Bettini, Humberto F.A.J. & Silveira, José Maria F.J. & Oliveira, Alessandro V.M., 2018. "Estimating strategic responses to the march of a low cost carrier to primary airports," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 109(C), pages 190-204.
    4. Zhang, Li-Hao & Liu, Chunxiao & Zhang, Cheng & Wang, Shanshan, 2023. "Upstream encroachment and downstream outsourcing in competing shipping supply chains," International Journal of Production Economics, Elsevier, vol. 255(C).
    5. Zuidberg, Joost, 2019. "Network geographies and financial performances in low-cost carrier versus network carrier competition: The case of Norwegian versus SAS," Journal of Transport Geography, Elsevier, vol. 79(C), pages 1-1.
    6. Bernardo, Valeria & Fageda, Xavier, 2020. "Impacts of competition on connecting travelers: Evidence from the transatlantic aviation market," Transport Policy, Elsevier, vol. 96(C), pages 141-151.
    7. Edward C. S. Ku & Chun-Der Chen, 2020. "Flying on the clouds: how mobile applications enhance impulsive buying of low cost carriers," Service Business, Springer;Pan-Pacific Business Association, vol. 14(1), pages 23-45, March.
    8. Wang, Junjin & Liu, Jiaguo & Zhang, Xin, 2020. "Service purchasing and market-entry problems in a shipping supply chain," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 136(C).
    9. Renan P. de Oliveira & Alessandro V. M. Oliveira & Gui Lohmann, 2021. "A Network-Design Analysis of Airline Business Model Adaptation in the Face of Competition and Consolidation," Transportation Science, INFORMS, vol. 55(2), pages 532-548, March.
    10. Valido, Jorge & Socorro, M. Pilar & Medda, Francesca, 2020. "Airport capacity and entry deterrence: Low cost versus full service airlines," Economics of Transportation, Elsevier, vol. 22(C).
    11. Soyk, Christian & Ringbeck, Jürgen & Spinler, Stefan, 2021. "Effect of long-haul low-cost carriers on North Atlantic air fares," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 152(C).
    12. Miyoshi, Chikage & Rubio Molina-Prados, Jesus, 2022. "Measuring the impact of long-haul low-cost carriers on lowering fares: A quasi-experimental design to assess the pre-COVID market," Transport Policy, Elsevier, vol. 128(C), pages 52-64.
    13. Chiambaretto, Paul & Combe, Emmanuel, 2023. "Business model hybridization but heterogeneous economic performance: Insights from low-cost and legacy carriers in Europe," Transport Policy, Elsevier, vol. 136(C), pages 83-97.
    14. Peng Du & Lei Xu & Rou Luo & Mingzhu Hou, 2024. "Competing with Low Cost Carrier in a Sustainable Environment: Airline Ticket Pricing, Carbon Trading, and Market Power Structure," Sustainability, MDPI, vol. 16(2), pages 1-17, January.
    15. Ku, Edward C.S., 2022. "Developing business process agility: Evidence from inter-organizational information systems of airlines and travel agencies," Journal of Air Transport Management, Elsevier, vol. 103(C).
    16. Alavi Fard, Farzad & Sy, Malick & Ivanov, Dmitry, 2019. "Optimal overbooking strategies in the airlines using dynamic programming approach in continuous time," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 128(C), pages 384-399.
    17. Shen, Ching-Cheng & Yeh, Chien-Chi & Lin, Chun-Nan, 2022. "Using the perspective of business information technology technicians to explore how information technology affects business competitive advantage," Technological Forecasting and Social Change, Elsevier, vol. 184(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Alderighi, Marco & Gaggero, Alberto A. & Piga, Claudio A., 2022. "Hidden prices with fixed inventory: Evidence from the airline industry," Transportation Research Part B: Methodological, Elsevier, vol. 157(C), pages 42-61.
    2. Borsati, Mattia & Fageda, Xavier, 2024. "Airline price responses in the face of demand shocks: European lessons from the COVID-19 pandemic," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 186(C).
    3. 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.
    4. Oliveira, Marcus V.R. & Oliveira, Alessandro V.M., 2018. "What drives effective competition in the airline industry? An empirical model of city-pair market concentration," Transport Policy, Elsevier, vol. 63(C), pages 165-175.
    5. Luttmann, Alexander & Gaggero, Alberto A, 2020. "Purchase discounts and travel premiums during holiday periods: Evidence from the airline industry," MPRA Paper 104863, University Library of Munich, Germany.
    6. Fageda, Xavier, 2014. "What hurts the dominant airlines at hub airports?," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 70(C), pages 177-189.
    7. Bergantino, Angela Stefania & Capozza, Claudia, 2014. "One price for all? The role of market captivity as a price discrimination device: evidence from the Italia city-pair markets," Working Papers 1401, SIET Società Italiana di Economia dei Trasporti e della Logistica.
    8. 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, 01.
    9. Gaggero, Alberto A. & Luttmann, Alexander, 2023. "The determinants of hidden-city ticketing: Competition, hub-and-spoke networks, and advance-purchase requirements," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 173(C).
    10. Bernardo, Valeria & Fageda, Xavier, 2020. "Impacts of competition on connecting travelers: Evidence from the transatlantic aviation market," Transport Policy, Elsevier, vol. 96(C), pages 141-151.
    11. Luttmann, Alexander & Gaggero, Alberto A, 2022. "How does COVID-19 affect intertemporal price dispersion? Evidence from the airline industry," MPRA Paper 111797, University Library of Munich, Germany.
    12. Bettini, Humberto F.A.J. & Silveira, José Maria F.J. & Oliveira, Alessandro V.M., 2018. "Estimating strategic responses to the march of a low cost carrier to primary airports," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 109(C), pages 190-204.
    13. Diego Escobari & Cristhian Mellado, 2014. "The Choice of Airport, Airline, and Departure Date and Time: Estimating the Demand for Flights," Advances in Airline Economics, in: The Economics of International Airline Transport, volume 4, pages 177-198, Emerald Group Publishing Limited.
    14. Bergantino, Angela Stefania & Capozza, Claudia, 2015. "One price for all? Price discrimination and market captivity: Evidence from the Italian city-pair markets," Transportation Research Part A: Policy and Practice, Elsevier, vol. 75(C), pages 231-244.
    15. Ivaldi, Marc & Petrova, Milena & Urdanoz, Miguel, 2022. "Airline cooperation effects on airfare distribution: An auction-model-based approach," Transport Policy, Elsevier, vol. 115(C), pages 239-250.
    16. Bergantino, Angela Stefania & Capozza, Claudia, 2014. "One price for all? The role of market captivity as a price discrimination device: evidence from the Italia city-pair markets," Working Papers 14_1, SIET Società Italiana di Economia dei Trasporti e della Logistica.
    17. 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.
    18. Gayle, Philip G. & Wu, Chi-Yin, 2013. "A re-examination of incumbents’ response to the threat of entry: Evidence from the airline industry," Economics of Transportation, Elsevier, vol. 2(4), pages 119-130.
    19. Marco Alderighi & Marcella Nicolini & Claudio A. Piga, 2012. "Combined Effects of Load Factors and Booking Time on Fares: Insights from the Yield Management of a Low-Cost Airline," Quaderni di Dipartimento 171, University of Pavia, Department of Economics and Quantitative Methods.
    20. Zhang, Yahua & Sampaio, Breno & Fu, Xiaowen & Huang, Zhibin, 2018. "Pricing dynamics between airline groups with dual-brand services," Transportation Research Part A: Policy and Practice, Elsevier, vol. 112(C), pages 46-59.

    More about this item

    Keywords

    Airlines; Yield management; Distribution management; Online travel agency;
    All these keywords.

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L93 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Air Transportation

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:transe:v:98:y:2017:i:c:p:151-170. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: https://www.elsevier.com/wps/find/journaldescription.cws_home/600244/description#description .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.