Price premiums and low cost carrier competition

This study presents a time series examination of price premiums in the US airline industry. Price premiums are defined as price markups due to domination and concentration at the airport and route market levels. The differential effect of these price premium drivers is empirically investigated, and it is shown that the largest components of price premiums are those from airport market share and airport concentration. The effect of low cost carrier competition on the level and composition of price premiums is of particular interest in this study. The results indicate that low cost carriers do not charge price premiums, and that high cost carriers’ price premiums tend to be lower when there is competition by low cost carriers. While the absolute values of price premiums have been fairly constant over the 1992–2002 time frame, the proportion of US passengers subject to price premiums has decreased due to the increasing share of low cost carrier traffic.