Adjustment of prices for quality change: A hedonic analysis of domestic passenger airfare

Adjusting prices for quality change is an important issue. This study employs a hedonic quality measurement technique to assess the effects of quality on domestic passenger airfare. The econometric analysis utilizes pooled quarterly data on average fare for the largest-share and the lowest-fare carriers, for each of the approximately top 1,000 routes from 1996:Q3 to 1998:Q2. The hedonic regression specifies airfare as a function of distance, total passengers, market share of the airline, and quality variables measuring on-time performance, oversales, baggage handling, complaints, and airline safety. Quality characteristics are found to have several important effects on airfare. Oversales revealed a statistically significant impact on airfare for all distance blocks, passenger complaints were important on short and long routes, and on-time performance and baggage handling were valued by customers only on shorter routes. Competition from low-fare carriers, and differences between airline groups are also identified to be important factors.