From the Fringe to the Forefront: Low Cost Carriers and Airline Price Determination
Low-cost carriers (LCCs) have transformed the US airline industry. They are now much larger and have moved into more direct competition with legacy carriers. This paper re-examines airline fare determination in this transformed industry. It finds that LCCs have a much larger fare impact than do legacies, but that their fare-reducing effect diminishes as they become dominant on a route. It also finds that legacy carriers primarily affect each others’ prices, whereas LCCs have a significant impact on pricing by both other LCCs and legacies. These and other results suggest a new and more nuanced role for LCCs in the domestic airline industry.
KeywordsAirlines Low cost carriers Price competition
The authors gratefully acknowledge the helpful comments on earlier versions of this paper from participants at the International Industrial Organization Conference and the Bates White Antitrust Conference, as well as from reviewers and the editor of this journal. We have also benefitted greatly from comments and suggestions from Gustavo Vicentini. All views expressed here as well as remaining errors are the sole responsibility of the authors.
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