The way of offering vertically differentiated airline services

This work investigates whether an airline should offer vertically differentiated services that are substitutes for its own services. Under a general setting, we show that offering only one type of service in any particular city-pair market is necessary for the airline’s profit maximization. This result justifies a common assumption in the literature that an airline offers only one type of service in a particular market. Further, this result can explain the empirical finding that airlines that offer a one-stop service are less likely to provide a nonstop service in the same market than those that do not do so.