Modeling Airline Pricing Part of the debate, says Spiller, represents an unwillingness to view airline prices like other consumer products. You cannot look at a ticket price and say, that's exorbitant, anymore than you can make the same claim of an automobile sticker price without considering the model, make, options offered, and demand for it at a given time. With these factors in mind, the airlines compete by offering distinct products, presented to consumers as fares. Unlike prior analyses of the industry, Spiller's model captures this labyrinthine system and the buying behavior it breeds. It sorts customers into two groups, business and tourist, comparing the purchasing behavior of both in choosing myriad products within the same market.
Density is a factor because larger aircraft used on dense legs lower per passenger costs.
Shaded areas show cost decreasing with increasing density. On very short and very long distances marginal cost rises as density increases. Very long legs are usually covered by large aircraft whenever density justifies a direct flight, so there is little opportunity to reduce costs on these routes. Focusing on data from 1985-93, the model shows travelers choosing from among 230,000 combinations of itinerary, fare and carrier in as many as 17,000 markets. And it looks at these thousands of markets separately in order to make that determination.