Pricing of imperfect substitutes: The next flight is not the same flight

Abstract

We investigate how airfares respond to changes in the fare of adjacent flights. Using a fixed effects regression on fares from Amsterdam to Geneva, we find flights that only differ in departure times to be weak substitutes. Fareto-fare elasticities for imperfect substitute flights of different airlines are even smaller, implying weak competition between airlines on this specific route. If our findings hold for other routes as well, this will have implications for the analysis of price dispersion in civil aviation. It would imply that demand shocks for individual flights have small effects on prices of other flights. Demand volatility would then be likely to affect price dispersion on a route level and should be considered when analyzing price dispersion.