Price rivalry in airline markets: a study of a successful strategy of a network carrier against a low-cost carrier

In the post-liberalization period, competition has increased in airline markets. In this context, network carriers have two alternative strategies to compete with low-cost carriers. First, they may establish a low-cost subsidiary. Second, they may try to reduce costs using the main brand. This paper examines a successful strategy of the first type implemented by Iberia in the Spanish domestic market. Our analysis of data and the estimation of a pricing equation show that Iberia has been able to charge lower prices than rivals with its low-cost subsidiary. The pricing policy of the Spanish network carrier has been particularly aggressive on less dense routes and shorter routes.

Research highlights
► The network carrier may reduce prices substantially with a low-cost subsidiary.
► The network carrier charges lower prices when it has a higher share on the route
► The pricing policy is more aggressive on short-haul and thin routes.
► On the short term, passengers may have benefited from the price rivalry
► On the long term, the elimination of a serious competitor may harm passengers