Abstract
We explore the interaction between full service carriers (FSCs) and low cost carriers (LCCs) in a market for air travel, of which flying is merely one component in a bundle of services. The paper employs a locational approach to product differentiation to provide insights concerning the degree to which LCCs compete with FSCs. This approach highlights the role of airports in both geographic location relative to the travel market and as independent business entities that generate both airside and groundside revenues. A simple address model is used to illustrate conditions under which LCCs (affiliated with subsidiary airports) only constitute partial competition for FSCs. Consequently, market interactions between FSCs and LCCs can exhibit price stability and relatively low price dispersion. The model also indicates that vertical relationships between airports and airlines can be both profit enhancing and socially desirable.
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