Price effects of airlines frequent flyer programs: the case of the dominant firm in Chile

Frequent flyer programs create a switching cost for the consumer and allow firms to obtain rents,for example,by exploiting the principal agent problem existing between the employee who travel and purchases the ticket and the employer paying for that ticket. In Chile LAN is the dominant airline in domestic markets and the only one that has a frequent flyer program (FFP); it faces some competition from two small carriers. Using a unique dataset for Chile,collected by ourselves from airlines websites in 2011 and 2012,we estimate the impact of the dominant airline FFP. For this purpose,we compare for each route the fares between airlines and between weekday trios (that accumulate full miles and are mainly for business purposes) and weekend trips (that accumulate less than full miles and are mainly for leisure purposes). The results show that the differential premium LAN is able to charge for weekday trips due to the FFP is around 35%. Three particularities of the Chilean market help the econometric identification: there is only one hub for all airlines (the capital city of Santiago),there is no business class in domestic flights,and none of the airlines is a low-cost carrier.