Claudio A. Agostini, Universidad Adolfo Ibanez Diego Inostroza, Manuel Willington, Universidad Alberto Hurtado discuss Price Effects and Switching Costs of Airlines Frequent Flyer Program.
ABSTRACT: Frequent flier programs create a switching cost for the consumer and allow firms to exercise market power. In Chile there is a dominant airline in domestic markets that has a frequent flyer program with a large number of affiliates and it faces some competition from two small carriers that do have a frequent flyer program. Using a unique dataset for Chile we estimate the switching cost of each airline and the impact of the dominant airline frequent flyer program on prices. The results show a fare premium of around 18% due to the frequent flyer program.
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