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Switching Costs and Price Discrimination by European Frequent Flyer Programmes

Jansson, Patrick LU (2015) NEKN01 20151
Department of Economics
Abstract
This thesis presents the two hypotheses that airlines use their frequent flyer programmes (FFPs) to introduce switching costs to combat competition by increasing the percent discount of the value of the points their FFP members receive, and that they use their FFPs to support price discrimination by offering business travellers more value for their travel choices. Economic theory to support these hypotheses is offered and real life data is collected for a number of routes from five major European airlines. The percent discount and value received by frequent flyers is regressed on price, competition level, and other relevant variables to determine their predictive strength and interdependence. The results and following analysis confirm the... (More)
This thesis presents the two hypotheses that airlines use their frequent flyer programmes (FFPs) to introduce switching costs to combat competition by increasing the percent discount of the value of the points their FFP members receive, and that they use their FFPs to support price discrimination by offering business travellers more value for their travel choices. Economic theory to support these hypotheses is offered and real life data is collected for a number of routes from five major European airlines. The percent discount and value received by frequent flyers is regressed on price, competition level, and other relevant variables to determine their predictive strength and interdependence. The results and following analysis confirm the hypothesis that airlines use their FFPs to support price discrimination since there is a strong connection between the price passengers pay and the value of the points they receive. The hypothesis that airlines use their FFPs to introduce switching costs when facing competition is only partially confirmed since only two airlines increase the percent discount they offer their FFP members when competition is high. The remaining three airlines instead lower the percent discount as they face increased competition. To accurately determine the reason for this difference, more detailed analysis is required. (Less)
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author
Jansson, Patrick LU
supervisor
organization
course
NEKN01 20151
year
type
H1 - Master's Degree (One Year)
subject
keywords
switching costs, price discrimination, frequent flyer programmes
language
English
id
5469556
date added to LUP
2015-06-30 10:55:33
date last changed
2015-06-30 10:55:33
@misc{5469556,
  abstract     = {This thesis presents the two hypotheses that airlines use their frequent flyer programmes (FFPs) to introduce switching costs to combat competition by increasing the percent discount of the value of the points their FFP members receive, and that they use their FFPs to support price discrimination by offering business travellers more value for their travel choices. Economic theory to support these hypotheses is offered and real life data is collected for a number of routes from five major European airlines. The percent discount and value received by frequent flyers is regressed on price, competition level, and other relevant variables to determine their predictive strength and interdependence. The results and following analysis confirm the hypothesis that airlines use their FFPs to support price discrimination since there is a strong connection between the price passengers pay and the value of the points they receive. The hypothesis that airlines use their FFPs to introduce switching costs when facing competition is only partially confirmed since only two airlines increase the percent discount they offer their FFP members when competition is high. The remaining three airlines instead lower the percent discount as they face increased competition. To accurately determine the reason for this difference, more detailed analysis is required.},
  author       = {Jansson, Patrick},
  keyword      = {switching costs,price discrimination,frequent flyer programmes},
  language     = {eng},
  note         = {Student Paper},
  title        = {Switching Costs and Price Discrimination by European Frequent Flyer Programmes},
  year         = {2015},
}