Market expansion, cannibalization, and international airline pricing strategy

The authors analyze market response and pricing of air travel on the Paris-Abidjan, Ivory Coast route operated by a French airline, Union des Transports Aeriens (UTA). They measure the impact of price on the overall size of the market, and examine the nature, pattern, and extent of cannibalization using a set of econometric models for overall passenger volume and for each fare class share. The present analysis shows that (1) only one class of fares expands the market; (2) cannibalization is very significant and highly asymmetric; (3) even small deviations from optimal prices substantially reduce profit. Based on these estimated models, the authors forecast demand for air travel and calculate optimal fares. They discuss how these models and results were used by UTA and the impact they had on pricing strategy.