Network Effect of Air-Travel Demand (PRELIMINARY)

Flight frequency is an important determinant of air-travel demand, but must be sustained by adequate demand, implying a feedback effect. Frequencies of link-sharing routes are related, implying a peer effect. The paper examines the effects, using a model of airline network where flight frequency is endogenized with passenger flow. An estimation strategy is proposed to help correct the possible biases under the assumption of exogenous product charateristics; it also circumvents the measurement problem of not observing quoted prices. On policy implications, the paper records the possiblility of negative marginal profits on some routes when peer effect is present; it also discusses the merger of two carriers with complementary networks.