Differential pricing at domestic and international airline gateway hubs

This article develops and tests an analytical econometric model of pricing for city-pair airline routes. We identify an explicit role for vertical integration and input foreclosure for airlines that bundle their components into composite goods. Using disaggregated data on more than 2000 airline-specific city-pair routes over the period of the third quarter of 2006 through the fourth quarter of 2008, we test the model and obtain estimates of pricing premiums associated with hubbing, distance, market size, input foreclosure and fuel costs associated with each route. The results shed new light on the importance that international gateway hubs play on price in a sophisticated revenue management setting.