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Do enhancements to loyalty programs affect demand? The impact of international frequent flyer partnerships on domestic airline demand

Authors


  • This is a revised version of Chapter 1 of my doctoral dissertation. I am grateful to Susan Athey, Nancy Rose, and Scott Stern for their many comments. I also thank Silke Januszewski, Avi Goldfarb, Ken Corts, Ig Horstmann, Tim Simcoe, the editor Ariel Pakes and two anonymous referees for helpful comments. Severin Borenstein generously provided the DOT DBIA data. I thank Michelle O'Neill at Inside Flyer magazine, Mary Kandel at OAG, Claire Fairfax at Reed Business Information, and Nina Rose at Northwest Airlines for help in assembling data. Financial support from the Kellogg School of Management and the Social Sciences and Humanities Research Council of Canada is acknowledged. All errors are my own.

Abstract

Frequent flyer programs (FFPs) may allow airlines to exercise market power on routes that depart from airports at which they are dominant. Prior research, however, has not disentangled the effects of FFPs from other advantages that dominant airlines may possess. I exploit variation in the extent and scope of U.S. airlines' FFP partnerships with international carriers to evaluate the economic impact of enhancements to FFPs. The results indicate that enhancements to an airline's FFP are associated with increases in its demand on specifically those routes that depart from airports at which it is dominant.

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