Abstract
Estimating the price elasticity of demand for air transport is essential to understand how demand responds to price variations and thus propose appropriate public policies and business strategies oriented toward this sector’s sustainability in its triple aspect (economic, environmental and social). This paper aims to provide a robust quantification of the price elasticity of demand for air travel on U.S. domestic routes using quarterly data from 1996:1 to 2021:4 on these routes from the Bureau of Transportation Statistics' Airline Origin and Destination Survey. Four different samples are analyzed to ensure consistency of the estimates obtained. The estimation method and the origin of the price changes are the main contributions of this research. Estimation is conducted using a quasi-experimental method to ensure that the supply curve shifts on a stable demand curve and that measuring the response of demand to price changes enables predictions about the demand for air travel. Although previous studies have addressed this issue, this research analyses a different situation, with flexible and changing prices, in which the change in supply is due to the decisions of the companies operating in the market rather than generated by public policies and rigid pricing environments (fixed fares). An analysis of airline supply shifts is added for the selected periods and routes. The estimation shows that the demand for passenger airline seats in the analyzed context is inelastic in the lower range but within the interval of most of the estimates found in the literature.
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Notes
The literature generally chooses the median to avoid the influence of extreme values. In this study, the possible influence of extreme values is minimized through the application of the QEM to different sample designs.
The Los Angeles, CA, to Phoenix, AZ, route fails this second condition, but this airline is both the dominant and the lowest fare setter, and it is this lowest fare that increases at approximately the same rate as the overall fare on the route.
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This research was partially subsidized by the “Agencia Española de Investigación” (España), (grant reference: PID2020-115454GB-C22 / AEI / 10.13039 / 501100011033); and the “Consejería de Transformación Económica, Industria, Conocimiento y Universidades (Junta de Andalucía) and Programa Operativo FEDER 2014-2020” (grant reference: PY20\00074).
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Escañuela Romana, I., Torres-Jiménez, M. & Carbonero-Ruz, M. Price Elasticity of Demand for Domestic Air Travel in the United States: A Robust Quasi-Experimental Estimation. Atl Econ J 51, 149–167 (2023). https://doi.org/10.1007/s11293-023-09779-4
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DOI: https://doi.org/10.1007/s11293-023-09779-4