Effects of transport service differentiation in the US domestic airline market

This study proposes a framework to identify and measure the extent of product differentiation among services provided by transportation firms, and applies it to the US domestic airline markets. By formulating and estimating an Almost Ideal Demand System and a set of price response equations for competing carriers, we investigate empirically the degree of substitutability between the services provided by Full Service Airlines (FSAs) and Low Cost Carriers (LCCs). Our results indicate that there is a significant differentiation in services provided by FSAs and LCCs. As a result, the presence of LCCs alone will not ensure healthy competition in a market. Therefore, it is important for public policy makers to attempt to maintain competition between FSAs even in the markets where LCCs have substantial market shares.