Are Frequent‐Flyer Programs a Cause of the “Hub Premium”?

Mara Lederman

82 citations0/0 files storedJournal of Economics & Management Strategy

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Abstract

This paper estimates the relationship between frequent‐flyer programs (FFPs) and fares at hub airports. I exploit the formation of partnerships that allowed members of one airline's FFP to earn that airline's points on flights operated by its partner. If FFPs allow an airline to charge higher fares on routes that depart from its hubs, these partnerships should allow an airline's partner to charge higher fares on routes that depart from these same airports. I find that offering the FFP points of the dominant carrier at an airport does, indeed, lead to higher fares. Combining these estimates with estimates of the “hub premium” suggests that FFPs may account for at least 25% of the “hub premium.”

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References

1987Markets with Consumer Switching Costs 1989Hubs and High Fares: Dominance and Market Power in the U.S. Airline Industry 1987The Competitiveness of Markets with Switching Costs 1994Economies of Traffic Density in the Deregulated Airline Industry 1987AIRLINE COMPETITION IN DEREGULATED MARKETS: THEORY, FIRM STRATEGY, AND PUBLIC POLICY 1992Fare Determination in Airline Hub-and-Spoke Networks 1996The evolution of the airline industry 1993Localized Market Power in the U.S. Airline Industry

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