The impact of income on airfare pricing

Abstract

The purpose of this article is to show possible changes in airline ticket pricing with the passengers' income distribution. Our study focuses on the issue of competition for traditional carriers (TCs) and low-cost carriers (LCCs). We assume the competition between these two competitors to be in the form of a Bertrand two-stage game. In the first stage, both competitors decide on the level of their airfares simultaneously, whereas in the second stage, consumers choose between high or low quality based on their consumer surplus. This surplus includes the individual's utility of ‘trip purpose’ and characteristics, the airlines' service quality and the airfare. The results indicate that the LCCs' market share would shrink and the TCs' market share would expand as the average income increases. To prevent loss of passengers and to increase profit, the LCC would have to lower its airfare so that broadens the price difference between TC and LCC. This can be achieved by taking advantage of smaller landing fees and higher aircraft utilisation rates.