Chapter 1 Pricing Behavior and Non-Price Characteristics of the Airline Industry: Introduction and Overview

Research analyzing competition and individual carriers' financial condition's influence on pricing behavior in the airline industry are presented in the first part of the book. The initial chapter by Manuel Hernandez, Anirban Sengupta, and Steven Wiggins directly tests whether competition creates a challenge for legacy carriers practicing nonlinear pricing such that passengers are charged different prices for the same flight without cost justification. The authors use transactions level data, which has the advantage of allowing an empirical examination of the effect of Southwest and other LCCs on both the level and structure of fares of legacy carriers. The analysis is performed by defining a menu of airline fare types according to restrictive ticket characteristics to then evaluate the competitive effects of both Southwest and other LCCs, including adjacent and potential competition from Southwest, on the relative pricing behavior of major carriers. Findings suggest that competition from Southwest has an important effect on both the level and fare structure of legacy carriers. In particular, direct and potential competition from Southwest both lower the fare per mile and compress the fare structure by decreasing the premia of the highest fares, including first-class tickets, over the lowest fares. Adjacent competition from Southwest and direct competition from other LCCs only seem to significantly affect the fare level.