Copyright. William Joseph Brennan

Transcription

1 Coyrght by Wlla Joeh Brea 005

2 The Dertato Cottee for Wlla Joeh Brea ertfe that th the aroved vero of the followg dertato: Arle Prg ad Caaty Behavor Cottee: Maxwell Sthobe, Co-Suervor. Preto MAfee, Co-Suervor Dale O. Stahl Davd Sbley Peter Wloxe Vjay Mahaja

3 Arle Prg ad Caaty Behavor by Wlla Joeh Brea, B.S.; M.S. Dertato Preeted to the aulty of the Graduate Shool of the Uverty of Texa at Aut Partal ulfllet of the eureet for the Degree of Dotor of Phloohy The Uverty of Texa at Aut Augut, 005

4 Dedato: I dedate th dertato to y aret Wlla Joeh Brea, Jr. ad Kathlee Mary Brea who have uorted e every way toward y oleto of the Ph.D. They have alway eouraged e to do y bet ad th work to ther uort ad redt. I would alo lke to dedate th dertato to y ter Kaela Brea ad brother Patrk ad J Brea. They have alo bee very uortve wrtg th dertato. I d lke to thak y gradother Kathlee Dllo ad Godother Magg Dua for all of ther eourageet. I d lke to thak Ale Chakkalakal for all of her uort. I d lke to thak y fred ludg Mke ell, Mark Daege, Pat Deey, Darre ad Mhaela Cook, r. Er Shel, Phl ad Mega Tok, Bra ad Marta Coor, Chrta rak, Mary ega, Doug Maurer, a Kuazawa who eouraged e to jut la [the age] together, Mela ala, Da ad Carol Per, Paul abarre, Sa ad Kathlee auh, al ad Na Kueh, the rao faly, ad Da ad a Gayor. All of the lu ay ore uetoed fred eouraged e ad lteed to ay a overato about the roe ad about lfe geeral. I d lke to thak Dr. udo eh, Dr. lly Stoller, ad Sady Tradahl for ther uort. ally I d lke to thak y ule Gerry Dllo for h uort. At oe ot he ad I were about the ae ot dfferet Ph.D. rogra but duty to h outry ha reveted h fro reahg th tage at th ot h lfe.

5 Akowledgeet: I would lke to thak y Co-Char, Dr.. Preto MAfee, for all of h oet, uggeto, ad feedbak o th dertato. I a greatly hoored to have had h erve. I would alo lke to thak y other Co-Char, Dr. Max Sthobe, for all of h oet ad uggeto. I a alo truly hoored to have had h erve. e too ha bee very helful, eeally ear the ed of the roe. I would lke to thak Dr. Pete Wloxe for all of h oet, uggeto, ad uort o the dertato ad h hel develog the C outer rogra that allowed e to vew the arle data Chater. I would lke to thak Dr. Dale Stahl, Dr. Davd Sbley, ad Dr.Vjay Mahaja for all of ther oet ad uggeto a ottee eber. I would lke to thak Dr. Doug Day for attedg y oral defee ad rovdg trgug ueto ad uort durg the defee ad durg the Uverty of Texa Job Plaeet Sear. I would alo lke to thak Dr. Da Slek, Dr. Ve Gera, Dae Eldrdge, ad the Uverty of Texa Job Plaeet Sear for ueful oet. I would lke to thak Dr. Ele. Eheverr-Carroll, Dr. oue Woltz, Dr. Darryl Youg, uha Wu, Shae Carboeau, Abe Du, Brett Wedlg, a Dko, ad h Przao for all of ther ueful oet ad duo. ally, I would lke to thak Vva Golda-effler for all of her uort o the adtratve ad eroal level. Truly he oe great Graduate Coordator to have o your de. Ay error are trtly y ow. v

6 Arle Prg ad Caaty Behavor Publato No. Wlla Joeh Brea, Ph.D. The Uverty of Texa at Aut, 005 Suervor:. Preto MAfee Maxwell Sthobe Stadard odel of re dero Butter, Vara, Burdett & Judd gve oe exlaato of how eulbra of fr ellg the ae rodut at dfferet re our by rovdg ouer wth dered forato or loyalty but a oo reervato re. Th odel exted thee odel by havg bue traveler ayg ore tha tourt. There a otuu of re broke by a ga rght above the oooly re of the tourt. I th rego, exeted fr roft are lower, a fr do ot ake u for the drete lo of leure traveler. The odel oared to Data Bak A a te-eret rado ale of arle tket terary. Idvdual arle route are how to have u to everal eak the etated re kerel dety. Th where the theory athe the data: arle fare luter aroud re. Kre ad Sheka geerate a lted aaty odel that geerate re radozato whe two fr have ueual aate. The large aaty fr ha the ablty to et re lower tha the aller fr. Butter, Vara, Burdett & Judd develo re dero odel a derbed before. A yetr two-fr odel develoed that ha both feature, lted aaty ad lted re forato, thu ufyg two v

7 darate lterature. The lower re fr ell out to aaty, whle the hgher re fr reeve the leftover utoer fro the old out fr lu the loyal utoer who dd ot ee the lower red fr. Th lead to re radozato. ted forato ad aaty are thu detal eoo effet. There a varety of ze of loyal utoer wth the arle, hotel, ad ar retal oae. A re radozato odel reated wth oe large fr of loyal utoer ad ay aller fr havg the ae ze of loyal utoer. r radoze by hargg the oooly re for the loyal utoer ad doutg to obta a grou of hoer eeg the lowet re of all the fr. The larget fr ha a ato at the hghet re the dtrbuto. The aller fr oete for hoer at all re the dtrbuto ad have o ato. v

8 Table of Cotet 0. INTODUCTION. 0. Bue ad eure Traveler reuet ler Progra.. 0. Dfferg Sze of reuet ler Progra.5 0. The Elte reuet ler Yeld Maageet ad Caaty tato The e of ow-cot Carrer ad allg Average Tket Pre. 0.7 Pre Dero. 0.8 Suary of Develoet Se Deregulato Suary of Dertato uture eearh...5. PICE DISPESION WIT DIEING CONSUME VAUES..6. Itroduto 6. terature evew Motvato.. 6. The Model...5 Coaratve Stat Exlag the Grah: Mathg the Coaratve Stat to Arle Data...6a Dug the Couter Geerated Grah....6b Mathg the Couter Grah to the Arle Data 7.7 Aaly ad Coluo.. v

9 . CAPACITY AND ANDOM PICES...9. Itroduto..9. The Syetr Two-r Model 5. Geeralzg to the Cae Where All But Oe of the r are Sold to Caaty Geeralzg to the Ayetr Model Buldg Caaty rt ad the Settg Pre Coluo...8. EQUIIBIUM PICE ANDOMIZATION WIT ASYMMETIC CONSUME OYATY Itroduto..85. The Model wth Two r.87. Coaratve Stat wth the Two r Model The Model wth r arge ad - Slar Sall r.58.5 Coaratve Stat wth the Modfed -r Model 6.6 Coluo... 7 APPENDIX PD, VAUATION CASE, AND DATA GAPS... BIBIOGAPY..6 VITA...68 x

10 Itroduto 0-. Bue ad eure Traveler Se deregulato, the arle dutry ha bee a dya ad extg dutry roe to ay hage. Several ajor tred develoed. The frt that arle foud that ot all traveler are the ae. Soe traveled ore freuetly tha other ad were wllg to ay uh ore for ther tket. Arle foud that a ot deregulato evroet there are bue traveler ad leure traveler. Bue traveler are thoe wllg to ay to dollar for flght ad akg reeat bue. Arle deed o th aller grou of traveler to ake u a ubtatal roorto of ther reveue. There are a varety of etate of how bg the overall grou of bue traveler grou to the arle. Durg the exao of the late 990, Uted Arle had 9% of t reu bue traveler ayg to fare geeratg 6% of the etre oay reveue! Braga, Carey, MCartey The reveue rodued today by th grou of traveler uh lower today. Southwet Arle etate that thrty fve eret of t aeger ay full fare Koeg. The Natoal Bue Travel Aoato etate that oe thrd of traveler deeed to be bue aout for oe half of arle reveue Bjorhu. The Aera Traort Aoato ore lberally etate that 5% - 55% of arle aeger that travel for bue uroe ore 60 to 70 eret of a arle reveue edor. Soe traveler obe bue wth leure o th etate ould be hgh.

11 Deregulato reulted the otued re of the leure la. eure traveler geerally earh vgorouly for lower fare a they are ot a wllg to ay a hgh fare a bue traveler. They geerally do ot ake a ay reeat tr a bue traveler. There are geerally ore leure traveler tha bue traveler, eve though bue traveler are the oe akg the tr uh ore freuetly. ro the etate above there are aywhere fro oe half to two thrd leure traveler o a average flght. 0-. reuet ler Progra ro a arle eretve, bue traveler are ther bet utoer beaue they are wllg to ay hgher fare ad they travel ore freuetly. Arle wat the bue traveler ad the leure traveler f they otue to ake reeat tr to kee akg reeat traato wth ther oay. The freuet fler rogra wa frt develoed by Aera Arle 98, ad oo oed by other arle, to reward traveler that ade freuet tr wth a artular arle Baley, Graha, ad Kala,. 60. Traveler ould reeve erk uh a early hek-, earate reervato atae, ugrade to frt la, free flght to regular detato the arle erve, ad free flght to exot detato that the arle erved uh a the Carbbea, Euroe, or awa. Eah of thee erk deed o the uber of freuet fler le that a traveler eared wth a arle. Th, tur, deeded o a ba level how ofte a

12 traveler traveled wth a arle, how far wth a arle a traveler travel, what fare a traveler ay, ad today what reogzed tatu the traveler ha wth the arle. The ore le a traveler obta, the ore hoe the traveler ha wth whh award a be redeeed wth the le. The freuet fler rogra hel reate a loyal bae of traveler to dvdual arle. Bue traveler who lt ther bue betwee everal arle loe out o the arual of beeft that lag ther bue wth oe arle ould rovde. The etve the freuet fler rogra trog for traveler to be loyal to a artular arle or two. Th, tur aue traveler freuet fler rogra, eeally bue traveler, to be le re etve to other arle. Th a be ee wth the followg exale. Suoe that a bue traveler hort,000 le of the 5,000 award level for a free reu frt la tket the eak eao betwee the Uted State ad Euroe ad dere the award for a laed vaato ad urhag a roudtr tket tr betwee New York ad o Agele a dtae that would ut h or her over the award lt. ow uh heaer ut the tket be o a oetg arle that the traveler ha o te for the bue traveler to wth or eve gve oderable oderato, eeally f the bue traveler ot footg the bll? Southwet Arle ad eward Progra doe ot deed o atual le flow but o eget flow. Thu a Aut Dalla ove eget out a uh toward a ad eward redt a a Phoex Baltore eget. Mot other arle have a u floor of 500 le that a be eared by a eget o ther freuet fler rogra. Mot of the legay arrer have etablhed the lat deade rogra that reward traveler that ake heavy travel wth the at year. There are geerally three level baed o the uber of eget traveled or the uber of atual le traveled. The reward for obtag oe of thee level are aoated wth freuet fler wth very hgh leage uh a early hek-, earate reervato atae, et. Ug Aera Arle Advatage eward Progra foud at

13 eure traveler a be ofteed a lar way to a leer extet by freuet fler rogra. Wherea leure traveler ay ot travel a uh a bue traveler, they a auulate freuet fler le through rooto uh a redt ard ot, auto retal, ad hotel rogra. Aordg to ady Petere, Publher/Edtor Ide lyer agaze, 0% of all freuet fler le are auulated by ot flyg htt:// The fatet growg eget of the oulato wth freuet fler le thoe that are `leage ouer ot freuet fler Ibd. Wth freuet fler le beg auulated by a la of eole ot travelg very uh, the oaoal flght by thee ouer ore lkely to be doe o the arle that they have le, eeally f they are loe to a free tket. Wth the troduto of freuet fler rogra, a la of traveler loyal to a artular arle ha bee reated e deregulato. Mot arrer evolved to hub ad oke oerato whh oe ty the hub where ot flght orgate ad deart ad the other te the etwork feed to the hub. Paeger travelg throughout the etwork ake oeto throughout the hub thu allowg a arle to erve ay arket wth oe or fewer oeto. Arle oeted over the ze of ther etwork ad ofte the large arle had ore tha ore tha oe hub ther etwork to broade ther oe. Cobed wth freuet fler rogra, arle ould ue the breath of ther etwork to w aroval of the reeat freuet fler, who eeded to ue the erve of the etwork ofte. Th obato eeally work well hub te, where arle offer ther bet erve oto erve everal te a day to ay detato. Borete 989 foud evdee

14 that fare are hgher hub te tha o-hub te at a hgher eretle of fare. Arle ould offer the exave etwork ready for bue ue whe traveler are ayg to fare ad the offer the reah of that ae etwork to exot loato at the te freuet fler le are redeeed for free tr. 'You a fly a llo le o roter [Arle], but t wll ever get you to Par,' ad Uted [Arle] okea Jao Shehter. 'It' ale veru orage. We have a uathed global route. We have frt la' Agular. C Dfferg Sze of reuet ler Progra The heer ze of Uted Arle veru roter Arle ot oly athed aual reveue, etwork ze, but the ze of freuet fler rogra. Uted boat of aroxately llo freuet fler eber whle roter Arle reort over oe llo freuet fler eber htt:// There a varety the ze of freuet fler rogra. Table how th dfferee a t lt atual erollet of the freuet fler rogra 5. The forato oe fro htt:// 5 webfler.o alo lt hotel freuet tay eberh total ad Aera Exre Meberh eward total. 5

15 Table : Sze of reuet ler Progra US, Caada, Mexo Arle Meber Data eorted a of: AeroMexo,600,000 6/0 Ar Caada 6,000,000 /0 Alaka Arle,700,000 8/0 Aloha Arle 00,000 /0 Aera Wet,00,000 8/0 Aera Arle 8,000,000 /05 Cotetal Arle 9,000,000 /0 Delta Arle 5,000,000 9/0 roter Arle,000,000 9/0 awa Arle 880,000 8/0 Mexaa Arle 85,000 8/0 Mdwet Arle,65,000 /0 Northwet Arle 5,000,000 8/0 Uted Arle,000,000 /0 US Arway,00,000 /0 The lt above oly how erollet uber. ady Petere, Publher/Edtor Ide lyer agaze, etate that oly 7 8% of erolled freuet fler are atually atve htt:// urtherore, fler do eroll ore tha oe rogra. Thu the atual erollet uber do ot tell the etre tory of the 6

16 dfferg ze of freuet fler bae for eah arle. If forato wa avalable, the total of freuet fler ould be broke dow to etroolta area. Though Aera Arle ha a hgher freuet fler eberh total tha Northwet Arle, the total Northwet Arle WorldPerk eber Detrot, Mhga uh hgher tha Aera Arle AAdvatage eber beaue Northwet Arle ha a hub Detrot. roter Arle ay be loer ze to Uted Arle the Dever etroolta area ter of freuet fler eberh, where both arle have hub. 0-. The Elte reuet ler The freuet traveler of the freuet fler ted to brg arle a gfat orto of ther reveue. Arle reward th grou of traveler wth extra le, freuet ugrade to frt la, rorty allg to a -800 le, ad rorty boardg. Uually, arle have a ter la wth hgher ter beg for hgher travel wth the arle. Travel a be defed a wth the at year or lfete travel wth the arle. Aera Arle, for tae, ha Gold, Platu, ad Exeutve Platu for t bet utoer. Thee traveler otrbute ore to the arle reveue we tha the average freuet fler. Petero etate that Uted Arle ha aroxately 800,000 total fler eber ther three elte lae Aguar, C0. Petero etate that there are aroxately 07,000 total fler that have over a llo le wth a artular arle wth 50,000 obed wth Aera, Delta, ad Uted 7

17 Arle Stoller, 8B 6. or Aera Arle, a traveler earg oe llo le wth the arle ear a lfete Gold Meberh. Whether eaured by uulatve atvty traveled for oe arle or by uulatve atvty the at year for oe arle, th la of freuet traveler ay be aother way to eaure the tregth ad reah of arle freuet fler rogra Yeld Maageet ad Caaty tato Aother ajor tred that otued after deregulato wa the otued re of yeld aageet yte. Arle tarted to vetory ther eat a outerzed vetory yte well before deregulato frt to rovde real te forato to arle eloyee ad travel aget akg reervato for aeger. Seat were oartetalzed to varou ategore refletg the dfferet tye of rule aoaed eah tarff or fare. Durg the erod of regulato, eah tarff or fare wa otrolled by the Cvl Aeroaut Board Wahgto, DC. Sale ad rooto were reet the regulato era. owever, the reet yte of yeld aageet tll had to wat, a t wa uberoe to aly to Wahgto to have aroval for fare ode haged o route ror to deregulato. oute that had fare haged were et or eve halleged by oetg arle Baley, Graha, ad Kala. 6. After deregulato, the tool were et lae for the growth re dero. Arle ket the fare la yte. New lae of dout la tarff aeared for the 6 Aordg to Petero at webfler.o, the ero wth the hghet ulaed freuet fler leage total ha llo le! 8

18 leure traveler offerg great avg off the tadard oah fare Baley, Graha, ad Kala,. 7. Se thee heaer eat were ot a roftable a a tadard oah eat at a hgh re, arle foud way to otrol how they old dout eat. Arle ue re drato tat tarff how ay day advae the aeger urhag the tket advae or whether the aeger tayg over o a Saturday ght to detere f a dout tarff ale bd. More ubtly, arle et a lt o the uber of eat that a be old at the dout fare o a flght ba bd. Oe that dout eat aaty lt reahed o a flght aeger have to ay the ext hgher fare or hooe aother flght wth the ae dout eat. To kee trak of the exloo of ew tarff lae, rule, ad vetory o eah la o route aro ther etwork, arle eeded the erve of ohtated outerzed reervato yte. Arle ue the outerzed reervato yte to otatly readjut ther vetory of eat to axze ther oble reveue. The etre roe develoed wa alled yeld aageet yte that axzed reveue fro every arle eat gve arket odto Sloae. Thee odto luded ot to the arle, re that oettor arle are hargg, htoral tred of bue ad leure traveler, the overall eooy erforae, ad uly ad dead odto wth a gve ubla of eat, flght, ad route bd. Arle uually hage flght wth ther yte lowly o uly of overall eat o a flght ay be fxed but dead eah day o a artular flght a be ute varable Shtt ad Wlla. Arle ue everal year worth of data o flght to redt aeger traff to foreat dead o a route Shtt ad Wlla. Subategore of eat wth earate tarff are tally 9

19 dtrbuted aro eah flght a t tally etered to the yte alot a year ror to dearture Shtt. Arle leave a ay eat a redted to bue traveler, who are wllg to ay uh ore tha the leure traveler, whle ellg eat to the leure traveler bd. A dead odto hage betwee leure ad bue traveler, arle hage vetore of eat betwee lae of eat o a flght. Suoe ore bue traveler ake ore early bookg o the Aera Arle Dalla Tula 8:00 P.M. flght tha exeted. The Aera wll redue the uber of dout eat avalable for bookg ad reae the uber of hgher red bue lae of eat. The adjutet ould be week out or wth hour of dearture Shtt. Th adjutet roe geerally vble to the ouer. The et reult of yeld aageet a reae reveue for the arle ad a reae load fator bd. Every day arle fae a roble of erhg vetory, aely eat that go ety whe flght take off. A of ow, ajor arle geerally kee a fxed hedule wth or adjutet over te wth euet ad flght for a et erod of te. Wth et aaty level to arket, arle fae the roble of uerta dead to ther arket, oete ot eough aaty, oete too uh aaty. Colatg the uertaty of dead the uertaty of the x of traveler betwee leure ad bue traveler. Yeld aageet hel arle axze reveue gve the aaty they have o the route ad ze ety eat. 0

20 Due to yeld aageet, arle offered dout eat lted aaty. Traveler are odtoed to ho aroud for the lowet fare oble. If oe arle ell out dout eat o a flght or uote a hgher re beaue t doe ot offer hea eat o that flght, utoer wll ho for aother flght for the ae arrer that offer lower re. If a arrer flght eleto old out of the lowet fare, thoe ot overly loyal to a artular arle wll go to other arle to obta hea eat. Thu arle that do o ell out to aaty have a redual dead fro other arle that old out ther vetory. Th yte of offerg dout eat otatly flux. Se the tart of deregulato, arle bega exeretg wth hagg fare or fare lae otatly or offerg all out fare war. I the late 980 Uted Arle ade 0,000 fare hage daly alto,. urtherore, Uted otored advaed tket ale o 0,000 of t total flght the outer yte ad haged the fare la dtrbuto of eat o 5,000 flght daly. bd. Chage aaty were reoble for ot of Uted daly fare hage bd. If aeger total reaed or a oettor redued aaty, the fare reaed at Uted bd. Arle oete ru yte-wde ale. Soete thee ale are rooted by the arle reoe to yte-wde bookg beg lower tha aaty. Arle wll ut a erta eretage of eat o dout ther whole yte for oe te. Soete ale are arle atg retalato to aother arle for oe ato. Aera Arle, for tae, reoded to Northwet uderuttg t lfed fare

21 truture 99 wth a 50% off all dout oah eat ad oved the day advae urhae reureet to eve day advae Saluka,. D. The roe of uttg eat o dout ha beoe refed that arle are targetg ef arket or ef erod of te wthout gog to a broad re war. Aera Arle, for tae, ut eat o dout for Mother Day weeked 005 Aera Arle Pre eleae /7/05. The Mother Day Sale dd ot lead to a broad fare war. Arle have develoed weekly eal broadated by eal that ut erta route o ale. Southwet Arle ha take the roe further wth t DING! rogra, offerg eal to artatg outer uer for a few hour Southwet Arle Pre eleae: ebruary 8, 995. By ltg the erod of dout to a hort erod of te, arle are avodg all-out re war o all of ther dout eat The e of ow-cot Carrer ad allg Average Tket Pre There ha bee a re of the low ot arrer e deregulato. Southwet Arle ha grow to oe of the to doet aeger arle fro a all regoal arle at the begg of deregulato. Aera Tra Ar, Ideedee Ar, Jet Blue, roter, Aera Wet, Ar Tra, ad Alaka are all ow odered low ot arrer. All of the exet for Alaka have bee reated e deregulato. Other lowot arrer uh a Mdway Arle, Peole Exre, ad Pedot Arle ether were erged or ludated. Eve the ajor or legay arrer are oyg the low ot arle a Ted ad Sog are earate low-ot arle wth Uted ad Delta

22 reetvely. ow ot arrer arket hare jued fro 0% 000 to lghtly over 0% 00 Walh,. B. More revely, the eretage of eat arket loger tha,000 le the otguou Uted State erved by low ot arrer ha jued fro % 999 to 7% 00 Mayard, Seto, 7. The overall effet of the troduto of the yeld aageet yte ad lowot arrer wa that average arle fare fell a a reult of deregulato a arle oeted for the leure traveler. The Arle Traort Aoato reort that doet aeger yeld er aeger le fell 8.8 eret betwee 978 ad 00, adjutg for the Couer Pre Idex Ar Traort Aoato 00 Eoo eort.. The Geeral Aoutg Offe reort that betwee 979 ad 99 fare er aeger le, adjuted for flato, fell 9% for all outy arort, % for edu zed outy arort, ad 8% for large outy arort GAO /5/ The Arle Traort Aoato reort that oal total ludg teratoal travel arle reveue er aeger le fell 0.6% fro. et er aeger le 99 to.7 et er aeger le 00 Ar Traort Aoato 00 Eoo eort. 7. Th aelerato of the eroo of arfare betwee 99 ad 00 tralate to a average lo of $.90 fro $.0 to $7.0 - for a oe- way flght of 000 le. Eve wth the olated yeld aageet yte avalable, there ha bee a exloo dout eat for ar travel.

23 0-7. Pre Dero Dete the dele average tket re, there ha bee a re of re dero wth the dutry. Arle douted for the leure traveler but raed re for bue fare. Bue traveler ad evety eret hgher fare 000 tha 980 aburger 7. eure fare fell the ae erod a bue fare roe aburger 8. ecipse advor, a ubdary of Aera Exre Bue Travel, etate that the tyal bue fare refudable, three day advae o route t otor $0 oe-way 00 Aera Exre Bue Travel Motor Pre eleae //0. The ae ubdary etate that average fare ad by t utoer travelg o route otored by the ae BTM grou are at a lower $7 Ibd 9. Thee bue fare are uh hgher tha the average oe-way fare lted by the Aera Traort Aoato. Yeld aageet yte take advatage of th wde read of wllge to ay aog ouer wth ay dfferet fare. Pre dero the arle dutry a be ee by lookg at the eod uarter of 995 Data Bak a, whh a 0% rado ale of arle tket. The followg hart how adjuted oe-way fare dfferee o eleted route both 7 Soe of that ga betwee 980 ad 00 ha eroded. I a SABE tudy bue fare average roudtr fare urhaed three day fro dearture fell % betwee May 00 ad May 00 eed A. Wth the troduto of Slare by Delta Jauary 005 that ut the axu oe-way fare to $99 o doet route, the tred of lower bue fare otue well to 005 htt:// I July 005, Delta raed athed by other legay arrer the axu oe-way fare to $599 due to hgher ol re. 8 Jae gg, arle aalyt at Credt Sue rt Boto reort that leure fare have bee reeg u betwee 00 ad 00 due to dout arrer rag re Gratha.. Th tred ha otued today wth the legay arrer rag fare o a oule of te th year due to hgh ol re. 9 Thee average bue fare lude full fare, heaer orefudable fare, ad egotated ororate dout Aera Exre Bue Travel Motor Pre eleae //0.

24 dreto luded betwee the 5%le ad 75%le lu the ea, eda, ad tadard devato. Iterare are ether oe-way or loed loo roud tr. I the ae of a loed-loo roud-tr, the fare dvded by two to get the oe-way fare. Table : oute Pre Dero oute # Pax 5%le Meda Mea 75%le Dfferee Stadard Std. Both d 75%le Devato Dev./ Dreto Qtr 95 5%le Mea AXEW 7,0 $5 $9 $5.9 $5 $00 $ OMAGA 9,800 $7 $67.5 $.55 $00.50 $8.50 $ MCOSEA,990 $5.50 $96 $.0 $7 $9.50 $ ASPX 7,500 $7 $0 $50.06 $67 $0 $ SOOD 7,570 $0.50 $90.50 $78.7 $8 $50.50 $ DUSAN 8,80 $50.50 $9 $9.0 $09.5 $58.75 $ AUSBOI,0 $5 $.50 $7.5 $.50 $88.50 $ AMSP 9,00 $95.50 $.50 $. $0.50 $5 $7. 0. ANNO 70 $5 $76.50 $79.6 $0 $95 $ AXDW 0,70 $ $89.50 $59.6 $ $8 $ PDEN 50,0 $8 $6.50 $. $0.50 $66.50 $ ICGEG 60 $75 $0.50 $7.68 $0 $65 $ BOSMIA 7,00 $6.50 $5 $6.7 $77.50 $6 $ TPAGA 88,0 $ $ $5. $8.50 $68.50 $

25 DTWPIT 0,070 $.50 $86 $.6 $6.50 $05 $ PVDO 8,0 $88.50 $0 $6.70 $57 $68.50 $ PWMAX,90 $7 $ $.6 $66 $9 $ ATDCA 05,50 $90.50 $07.50 $09.7 $05.50 $5 $ AMADCA,50 $88.50 $08.50 $6. $90.50 $0 $ AXOD 97,550 $.50 $8.50 $56.80 $99.50 $58 $ PXBOS 59,60 $7.50 $85.50 $7. $57 $09.50 $ IAGA 57,0 $75.50 $87 $79.7 $ $75 $ BIAX,80 $.50 $6 $89.79 $ $86.50 $ SAVANC 0 0 $0 $09.50 $5.7 $0 $0 $ STSEA 5,80 $9 $.50 $6 $0 $9 $ SDCT 500 $9 $6 $96 $59 $0 $ MCISJC 8,990 $7.50 $ $6.69 $.50 $06 $ NOD 0,870 $0 $06 $8.9 $87.50 $87.50 $ IADSO,80 $65.50 $ $05.79 $7 $5.50 $ ANCAI,660 $69 $98 $90 $99 $0 $ Average 5,78 $.5 $79.9 $09. $7.9 $5. $ Weghted $7. $65. $0.89 $67.5 $50.0 $ Average 0 Delta the oly arrer reortg aeger betwee thee two te. reuet fler ake u alot half of the 0 traveler. If freuet fler are elated, the 50%le o fare ad ju to $0. The 5%le, eda, average, ad 75%le fare re to $9.50, $, $9., $6.50 reetvely f freuet fler ad o-reveue aeger are elated fro the ale. 6

26 Table how that there dero all route. The u tadard devato fare $0.8 o the Phoex, AZ to a Vega, NV route. owever, the average fare o that route extreely low at $ Thu the tadard devato/average o that route ot the lowet the ale. Soe route have extree re dero. or tae, the outo Iterotetal, TX New York, NY aguarda arort ha a tadard devato of $.5 ad a whog $75 dfferee betwee fare at the 5 th eretle level ad 75 th eretle level! Whe eaured by tadard devato/average re, the outo-new York route aroxately 50% hgher tha the Phoex a Vega route. A le regreo wth aeger beg the deedet varable ad eda, tadard devato, dtae, duy for low ot arrer, ad uber of oto arrer beg the deedet varable rodue the followg reult: Table A Sle egreo wth Paeger a Deedet Varable Suared 0.79 Adj. Suared ,.0 Prob > Ideedet var. Coeffet Stadard error t Prob > t Meda Stadard dev Dtae ow Cot # Noto Carrer otat

27 Obeyg the law of dead, the oeffet of eda egatve.. Iteretg that tadard devato otve ad gfat. arger arket geerally have ore varato re by the eaure of tadard devato. The uber of oto arrer extreely gfat ad date a large orto of the varato aeger. A better regreo ght lude the erfdahl dex ad adjut for the freuet fler/oreveue aeger Suary of Develoet Se Deregulato There have bee everal tred e deregulato. There ha bee the re of two dfferet tye of traveler bue ad leure traveler. Average fare ad by thee bue traveler are uh hgher tha leure traveler. There a la of bue traveler that travel uh ore tha the average ubl. The develoet of freuet fler rogra ark a way for arle to reward thoe otrbutg the ot reveue. Not all arle are the ae ter of freuet fler. A ha bee ee, Aera Arle freuet fler rogra today alot ffty te the ze of aller roter Arle. htt:// Wth the dfferee of bue traveler wllge to ay for flght oared to leure traveler, arle have develoed ohtated yeld aageet yte that lt the aaty of dout eat favor of lat ute bue traveler. Oe If ea ued tead of eda, the regreo ot a robut a eda. Addg 5le ad 75le a deedet varable lower the adjuted uared ad. Ug 75le u 5le rae the adjuted uared but lower. I th regreo of addg 75le u 5le, eda beoe gfat. Stadard devato/ea gfat. 8

28 dout eat ell out, hgher fare reult. Arle redt ug at data, urret eoo ad arket odto, what eatg aate hould be for the varou lae of traveler. Should odto hage or ot go a redted, arle ake adjutet to the yte. The re of yeld aageet yte ad low ot arrer ha reulted two tred: dereag overall average fare ad re of re dero. Average fare have falle e deregulato. The Aera Traort Aoato reort average doet reveue er aeger le ha falle alot 9% e 978, adjutg for CPI flato Aera Traort Aoato 00 Eoo eort.. The ATA reort that average fare o a oe-way 000 le flght are $ Ibd. The average fare e the ave re dero de the dutry. Tyal three day refudable fare are four te that aout 00 Aera Exre Bue Travel Motor Pre eleae //0. The average weghted tadard devato of a ale of thrty arket fro the eod uarter 995 $ The weghted tadard devato dvded by the weghted ea reult a rato of 0.7. Thu oe a olude that there re dero wth the dutry Suary of Dertato Th dertato odel oe of thee tred wth the arle dutry e deregulato. Chater oe odel re dero the dutry wth dfferg value of bue ad leure traveler. Arle are the ae ze of loyal utoer, who 9

29 ee oly oe re. Eah arle ha the ae aout of loyal traveler, who wll ay ay re at had u to ther reervato value. Arle oete for a grou of hoer, who earh all the arle for the lowet re. Arle a hooe to erve the bue arket, whh have both loyal utoer ad hoer. Arle a erve the leure arket, whh alo have a dfferet aout of loyal utoer ad hoer. I ether arket, fr radoze over a rage of re a there o ure re trategy. Uder erta odto of roft ot beg too bg the leure arket ad roft ot beg too bg ervg oly the loyal bue traveler, arle wll hooe to erve both arket. r radoze ther re over a terval of re large eough to erve both arket. I overg both arket, there a ga re edately above the reervato re of the leure traveler, where arle do ot radoze. I th rego, roft are le tha rego of re edately lower tha the oooly re of bue traveler ad oooly re of leure traveler. Thu there are two rego where fare luter. The odel a be exteded to the ae where there are ore tha two ouer valuato. A uulate dtrbuto futo ad robablty dety futo are geerated wth three ouer valuato, reultg two ga ad three rego where fare luter. The odel oared to the 995 Org ad Detato Data Bak a eod uarter. Soe larte are revealed. Ug the Eaehkov ethod of kerel dety etato, everal arle arket fare are grahed. Slar eah of thee arket fare luter aroud oe or everal re. Th luterg of re athe what the theory redt. 0

30 Chater two of the dertato odel re dero ad aaty ltato foud the arle arket. Two fr odeled ell to utoer that ee oe, oe, or both re. The utoer that ee oe re are loyal utoer. Thoe that ee both fr re are hoer. r have a aaty ltato. Eah fr aot erve the etre arket of t loyal utoer lu the hoer. Whe the re of oe fr lower tha the other, the lower red fr ell out to aaty. The hgher red fr ell to t loyal utoer lu the left-over hoer that aot urhae fro the lower red fr. Thu the hgher re fr reeve a extra bou of utoer that ould ot buy fro the lower red fr. Aug that there eough aaty the arketlae for the hgher red fr to hadle t loyal utoer lu the left-over hoer that ould ot urhae fro the lower red fr, fr radoze betwee okg ther ow loyal utoer lu the llover utoer at the oooly re ad doutg to w over the hoer ad ell out to aaty. The lowet re the dtrbuto roft at the oooly re of the hgher red fr dvded by aaty. The odel a be exteded to the ae of w fr where w- ell out to aaty. The lowet re the dtrbuto tll oooly roft of the hghet red fr dvded by aaty. Aga th ae aue that the hghet re fr ha eough aaty to hadle the left-over ouer fro the other fr. I the ae of ayetr aaty, there ot a eual lowet re the dtrbuto. If total aaty all, the aller fr ha the allet lowet re ad thu ha the ato at the hghet re. The aller fr ha ore lak to uderut the

31 hgher aaty fr. If total aaty hgh, the the ato hft to the larger fr a t ha ore lak t aaty to uderut the aller fr. I both ae, t aued that the aller fr ha eough aaty to hadle t loyal utoer lu the left-over utoer of the hgh aaty fr whe the low aaty fr ha a lower re. Whe the two fr lay a two tage gae that volve ettg aate frt ad the aoug re, the otu eulbru a yetr oe a the reato urve of both fr ro eah other at the yetr ot. Wth a ot of buldg atal ad roft beg lower wth ore aaty, the two fr wll buld the allet oble aaty. Eah fr et the re to the oooly re. Chater three odel re dero ad dfferg level of loyalty of utoer. The frt half of the aer ha two fr: oe larger the aout of loyal utoer that t erve tha the other. The eod half of the aer ha ay fr: oe fr that larger loyal utoer tha the other ae zed fr. The etu the ae eah half of the aer. The loyal utoer of eah fr ay whatever re at had. Eah fr ha the etve to harge ther grou of loyal utoer the oooly re. The larget fr ha ore of the o whe the re at the oooly re, the larget fr ear ore roft tha the aller fr. owever, there a grou of o-loyal hoer that buy fro the lowet re fr. If there are eough of thee hoer, all fr lower ther re to try to w the hoer. r re over a terval a there o ure trategy o a re that work wth thee two dfferet grou of utoer.

32 The terval of radozato of re for the larget fr ot the ae a the terval of re for the allet fr. The larget fr ha a lower u re tha the aller fr. Th le that the larget fr ha a ato t dtrbuto at the oooly re. Wth the ato, the larget fr doe ot oete a aggrevely ad thu all fr have the ae terval of re. Ireag the grou of loyal utoer for the larget fr ofte oetto for all fr e the larget fr lae ore weght o the oooly re. Ireag the grou of loyal utoer for the aller fr ha o effet o the aller fr robablty dtrbuto a they oete for hoer at all re ther dtrbuto. Proft for the aller fr, however, reae whe the loyal utoer for the aller fr reae. Ireag the loyal utoer for the aller fr lower the ato for the larget fr ad reae the doutg of the larget fr. Ireag the utoer grou of hoer aue all fr to be ore aggreve doutg. The lowet re fall ad uulatve robablty weght reae at every re below the oooly re. The ato for the larget fr dereae. If the loyal grou of utoer for the larget fr reaed at the ae te the loyal utoer for the allet fr are dereaed, the all fr dout le ad ore weght laed o the oooly re for the larget fr. If the loyal grou of utoer for the larget fr reaed at the ae te the hoer are dereaed, the the aller fr dout le. The larger fr geerally dout le, eeally f the uber of fr grow larger. If the loyal grou of utoer for the allet fr reaed at the exee of the hoer, the the aller fr dout le, beaue

33 there are le hoer. Uder th earo, the larget fr dout ore at lower re ad dout le at hgher re. The uulatve robablty of the u re reated ad aled to the odel. Ireag the loyal utoer for the larget fr dereae the uulatve robablty of the u re. Ireag the loyal utoer for the aller fr reae the uulatve robablty of the u re at all re exet at the oooly re. At the oooly re, the u re tatt zero, thu howg that the ato ha to be wth the larget fr. Ireag the hoer geerally reae the uulatve robablty of the u re. Ireag the uber of fr lower the uulatve robablty of the u re. Ireag the aout of loyal utoer for the larget fr, whle dereag the loyal utoer for the aller fr, lower the uulatve robablty of the u re. Ireag the aout of loyal utoer for the larget fr, whle dereag the hoer, geerally lower the uulatve robablty of the u re. Ireag the aout of loyal hoer for the aller fr whle dereag the grou of hoer lower the uulatve robablty of the u re a the uber of fr grow larger. Thee three hater, thu beg odelg oe of the haratert of the arle dutry e deregulato. All three hater have re dero betwee fr. A arle have olated yeld aageet tratege to axze reveue, thee three hater odel arle rg behavor a a xed trategy over a terval of re. All three hater odel loyal utoer. reuet fler are ortat to arle bue trategy. Modelg the trategy arle ue to kee freuet fler ayg hgh fare

34 take a varety of aroahe the dertato. Chater oe earate loyal utoer a bue ad leure traveler whle hater three odel dfferet ze of loyal utoer. Chater two uue that t oder aaty ltato that arle fae. oyal traveler, lu the redual utoer that are ratoed fro buyg fro the lower red fr, urhae fro the hgher red fr uture eearh uture reearh ould lude aaty ltato wth dfferg valuato of utoer. Arle ay te ell out ther lower re eat ad the leave the hghet eat left for the bue traveler. Dfferg ot of the arle dutry ould be odeled. ow would the addto of a lower ot arrer affet re dtrbuto? Extedg thee odel to ultle erod ght allow ore flexblty odelg freuet fler. Arle oete allow twety fve eret of eat o erta route to be award ad o-reveue aeger. ally, etwork ad ult-arket effet a be tuded. All three hater fou o oe artular route. What hae f there ore tha oe route? Thu lke the ever hagg arle dutry, there a everlatg uly of future odel that a be ued to further exla the dutry. 5

35 : Pre Dero wth Dfferg Couer Valuato -. Itroduto I the lat few year ueto have are o how the growg fluee of the teret ad eletro oere wll ultately at fr rg ower. Early aaly the re foued o the Bertrad eretve, derbg the very dhed rg ower. Mot redto were that old eooy fr wth etablhed arket ower e.g., brk ad ortar oae that dd ot adjut ukly to th ew edu of oere were gog to be uderut, ad that the oly fr gag arket hare would be the lowet ot fr, thoe had adjuted to the ew yberae world by ellg at razor th arg. Thee redto are o loger foud the atrea bue re. Brk ad ortar oae that were low to eter yberae are ot geerally ovg toward bakruty a ay had tally redted. May have etered the world of yberae, but tll odut a gfat orto of ther bue away fro yberae, whle alot all of the hgh flyg teret oae tok valuato have rahed. The lear-ut redto of how dutry wa gog to be haed have ether bee dredted or extreely louded by reet arket evet. What the doe the re of the teret ea for arket? The awer ay le arket that have already had a htory wth eletro oere. Thoe dutre that had already bee ubjeted to eletro re 6

36 oetto have oly otued to evolve wth the readg of yberae. ow the teret affet thee dutre ay be a revew of how other ay be affeted the future. Oe uh dutry the arle dutry, whh ha had to oted wth the eergee of teret tket ale. I Otober 999, the Wall Street Joural ra a frot age artle dug the at of the eletro oere o arle rg. I th artle, Wharto Bue Shool Profeor Er Cleo argue that the ole travel aget hel revet a "fullale re war for arle tket Cleo, 999." urther, he tate that "Eoot were offeded by th [reult]. They ad t a't be table - the Iteret ut rovde erfet oetto. [owever,] t 't [a erfetly oettve evroet]. If a rodut olex eough, eller a avod oetto by ervg dfferet utoer." The offeded eoot referred by Cleo geerally aue, the Jevo tradto, that there oe re that lear arket. Mot eoo odel are bult uder th auto. owever, there are eoot who have how how the world outde of oe learg re a ext, well before the Iteret beae atrea. I fat, three atter uggetg eulbra beyod oe re have beoe ore wderead: rooto, ouo, ad ajor re wg. or exale, Stgler 96 reort of a earler tudy about the detal ake ad odel of Cheverolet, whh have a tadard devato of $ o a average re of $6 ebruary 959, eve after aug a "average aout of 'hgglg.'" Th work out to be lu or u.% for two tadard devato. 7

37 rt, a the ortae of rooto grew, ajor retaler uh a Alberto, Wal-Mart, ad Target otue today to roote ale forato to ther ouer by the al or ewaer. lyer adverte dfferet te that are o ale eah week. Today, ajor arle, uh a Southwet Arle, eal ther utoer about the arket that have redued re that week. Seod, the dtrbuto of ouo have beoe ubutou: Suday ewaer have ther ow ouo eto or two. Booklet are dtrbuted aroud aue, tore, ad all. Pakaged rodut have ther ow ouo. Store have kok geeratg tore ouo. ally, ouer a rt ouo off the teret. Ther ue ay be advertg toward a ew rodut or to get ouer to buy ore of a erta rodut. Soete ouo try to ete ouer to hage ther ro-brad urhag habt uh a what brad of haburger bu they urhae wth the haburger eat Nazareo 00. Couo reurg two or three dfferet te urhaed before the ouo fae avg aed o to the ouer are ore oo today. Deartet tore have ouo that have ouer hooe what te reeve the eretage dout. ally, oe arket have ajor re wg. etaler ay offer a all out ale of u to 0% - 50% off tead of a otrolled weekly rooto. Deartet tore are ore lkely to rate th behavor tha the retaler uh a Wal-Mart. Arle alo egage th ort of behavor. arge fare war ofte develo betwee the large arrer that ed wth ever hagg deadle whe the ale wll ed. Soete a dvdual arle lay guerrlla tat: offerg large re dout wth arket Though the dtrbuto of ouo have reaed otat the at fve year, the redeto of ouo ha deled the lat fve ad te year. Nazareo 8 8

38 gog out of oe ty for a day or two oly, hog that the other arle wll ot ath fare or at leat ot adverte to ath fare 5. Th aer buld uo revou odel exlag delberate re radozato by fr. Prevou odel th fold uh a Vara 980, Butter 977, ad Burdett ad Judd 98 - have aued that ouer have a oo valuato. Th odel geeralze ther reult to ae where ouer have ultle valuato. Arle, for tae, have bue traveler ad leure traveler ttg ext to eah other oah. Th aer addree the ueto of whe ad how fr radoze ther re to dtguh the hoer ad o-hoer whe there are ultle ouer valuato, ad the eulbru truture of re dero ad how that dero deed o dead truture. The aer orgazed to 7 eto. Seto - derbe revou odel of re dero. Seto - rovde evdee of ultle ouer valuato ad t eral ortae. Seto - derbe the tal odel ad how what read of ouer valuato would eed to our for delberate re radozato by fr to lude all utoer. Coaratve tat are Seto -5. Seto -6 rovde a aaly the grah geerated by Matheata by luggg value fro the odel fro thoe grah geerated by arle data fro eleted route. Seto -7 gve the fal aaly of what leared fro th tye of odel. Aedx - ota grah fro Matheata ad arle data.. 5 or tae, ArTra Arway aoued a 8 hour ale to all detato out of Baltore ad Phladelha ArTra Pre eleae Augut 7, 00. 9

39 -. terature evew The law of oe re ad t oettve eulbru foudato date to Jevo 87. Startg wth Daod 97 there have bee a large uber of earh-theoret exlaato of o-oettve rg. Exlaato have dffered both auto- dfferg earh ot of ouer, dfferg ablte to re drate ouer tye, ad dfferet forato ee by ouer ad oluo overgee to oooly re, dvergee to a few re, ad dero over a re terval. Daod 97 gave the frt earh theoret exlaato of overgee to o-oettve re. Daod ehazed h aer that adjutet roee hould be baed o real fluee the eooy rather tha beg a arbtrary roe deged to yeld the oettve eulbru. e develo a dya odel that had re overge to the oooly re due to the ot of earh. Daod aue that the fr yetrally erve a arket for a drete good every erod; eah havg / frato of the erta arket dead urve X t. Daod ue the ot of earh two way. rt, he deotrate how the ouer hoke re t for the good oe erod fro ow would be greater tha the hoke re today t due to the ot of earh. Ug th dvdual ouer behavor, he how that the u re t the arket that allow everyoe to buy the rodut or the 0

40 u of all ouer hoke re a artular erod ut be odereag over te. Whe t roftable betwee the u full artato re t < *, the otal oooly re fr wll re t ad the re t, where ouer wll fd t worthwhle to wth to aother fr. Gve that t odereag over te, the re harged the arket t overge to the oooly re *. othhld 97 ehoed Daod hallegg eoot to develo odel that have edogeou aue for re dero. ro th hallege, there beae three dfferet hool of thought how re a vary. r wth rg ower a eloy re drato to dtguh betwee the varyg tye of ouer. Ug obervable haratert or hoe that ouer have ade theelve fro a lt or eu, fr dtguh betwee the varou tye of urhaer. The dero of re oe fro ouer eah ategory ayg dfferet re. Exale of re drato lude earatg ouer tye by age or ouo. Two a ue foued by the re drato lterature ha foued o how re drato affet welfare ad the role of arbtrage. Doe welfare rove or dele wth re drato oared wth ufor rg? or tae, Shaleee 98 ad Vara 985 et odto o outut where re drato wll ehae or at leat ot har welfare. Nahata, Krzyztof, ad Otazewk 990 takle the welfare ueto a dfferet agle. They how that that re ay reae or dereae wth ubarket due to thrd degree re drato but roft wll reae ulaterally.

41 Bede welfare ue, re drato ha foued o the ue of arbtrage. O the global level, wll aother fr go to bue to a arket where fr are re dratg? By buyg at the lower re ad the ellg t at a lghtly hgher re to the egeted ouer ayg hgher re the fr hel break dow the effet of re drato. The ue of arbtrage a alo be odeled o a eroal level. r offer a eu of re for ouer to hooe. Seeg th eu, a dvdual ouer ay rereet h or her tye or hage behavor to get a lower re. Takg th ouer arbtrage to aout, fr reate the rght etve for ouer. r axze roft ubjet to dvdual ratoalty otrat eurg that all tye of ouer artate - ad dvdual oatbly otrat akg ure eah offered eu oly aeal to thoe rght tye. The budle offered to the ouer are et by th ethod o that the etve for a tye to hooe a re offerg ot dreted to that tye zed. Other fator a exla re dero bede re drato o the ba of obervable haratert. I thee dero odel, fr offer a rado re ad t th radoe that the oure of re dero. ather tha offerg a gle re for ure, fr egage xed trategy behavor. Mxed trategy behavor by fr ay rodue hgher roft tha ure trategy behavor whe ouer have otve earh ot or whe ouer do ot have all the relevat forato. Mxed trategy behavor alo ould rovde the oly oluto ay of thee gae a ure trategy behavor aot ret o ay re due to the etve fag eah fr. r ould uderut eah other at a artular re to ga

42 ore arket hare oly to be further uderut at lower re. Th roe otue to argal ot where roft are the hgher at the oooly re. The other two lae of odel exlag re dero fall uder the xed trategy eulbra. The eod ategory of odel exlag re dero are fro earh ot of ouer. A tyal exale obert ad Stahl 99. They aue advertg reahe oe ouer but ot other. The other ut exed effort earhg to fd the re. I ther odel, whe earh ot reae, oe ouer ght fd t too otly to earh for the bet avalable re. r fearg the otetal of log ther bae ouer radoly offer oe dout to due eole to ho at ther tore. r adverte ore heavly thoe dout to ouer. To ake u for thee dout, fr rae the hghet re that the ufored hoer ay. Couer beoe ore fored about the otetal dout a the robablty of beg oletely ufored about ay tore offer fall. eervato re of ouer, where the exeted ga ad ot of earh are eual, re wth the reaed dero of re ad ot of earh. Whe reervato re re to the ot of ouer valuato of the objet or erve, ouer tart edg ther earh at the ot where reervato re eual valuato. Salo 977, Salo ad Stgltz 977, Carlo ad MAfee 98, ob 98, ad Stahl 989 are other exale of th la of odel. The thrd la of odel exlag re dero foue o the ex ot forato reeved by ouer rather tha the earh roe. A olated ellg trategy ouled wth the olete ablty of ouer to ee all relevat forato

43 allow ouer to vew fr rg a rado. Vara 980 ehazed th ot h odel that ouer aot lear the rg behavor of fr over te. Of th fal aroah to exlag re dero by delberate radozato the year after othhld' hallege, three odel - Butter 977, Vara 980, ad Burdett ad Judd 98 - ehaze the ex ot forato reeved by ouer. Uderlyg eah of thee three odel the olete ablty of ouer to ee the re of other oettor. Soe ouer were fored of the lowet re the arketlae ad oe ouer are le tha fully fored, hog oly at oe fr. Dero are thee odel a fr balae betwee aturg oooly roft fro ouer hog fro oe fr ad aturg the etre grou of ouer that earh for the lowet re the arketlae. The uber of ad that ouer reeve the al drve Butter' reult. Vara outrght aue the heterogeety ouer by lttg h ouer to fored ad ufored tye. Burdett ad Judd dvde the fored ad ufored by allowg the robablty of ouer eeg ore tha oe re to betwee zero ad oe. Butter 977 develoed a odel whh fr ed out ad at a fxed ot er ad.e. alg ot otfyg ouer whh tore rug the eal. A ouer ay or ay ot reeve ad fro fr. If a ouer reeve ad the al, he wll urhae fro the lowet re ad. Seller kow the lt re of ouer ad the dtrbuto of re that other eller offer but do ot kow exatly how ay ad that a ouer wll reeve. I hoog the uber of ad to ell out, eller wll wegh the exeted beeft of edg oe ore ad out agat the exeted ot of

44 rtg the ad. The re radozato reult fro two fore the odel: rt, eller wll ot re at argal ot to ature the etre arket e they wll loe oey after fatorg the fxed ot er ad. Seod, eller aot oetrate advertg above th re e aother fr a uderut the targeted re by elo ad ature the etre arket. Thu eller wll have to radoze eulbru. Vara 980 develo a oooltally oettve odel to derbe re dero by fr. Cot by fr are aued to be detal. r et ther re by the week. Cutoer are dvded betwee the fored ad the ufored tye. Thoe ouer that are fored wll kow what every fr hargg the arketlae ad ho at the fr wth the lowet re. The ufored ouer wll radoly hooe oe tore ad ay whatever the re that the tore hargg. Vara aue that the uber of ufored ouer all eough that fr wll have to alo eek the bue of fored ouer. ke Butter, Vara how that there aot be a a ot at ay other re lower tha the oooly re beaue there a be aother fr that a ature the etre arket of fored ouer by jut rg elo lower tha the oetrated re. I a ef ae that the ot futo ha a fxed ot ad o argal ot, Vara fd that dtrbuto of re wll be oetrated at the edot of the ot dtrbuto: at the argal ot ad at the oooly re. Thu, the re dety futo of the fxed ad o varable ot ae would ugget a atter of fr oaoally rug ale to get a orto of the fored ouer. 5

45 Burdett ad Judd 98 geerate eulbra wth re dero through the earh atter of ouer. r rodue a gular good or erve at the ae argal ot ad elet the re that they offer ouer. Couer have the ae reervato re, earh ot ad ae ethodology of earhg. I a euetal earh, ouer obta a uber of re uote at a te. A re dero eulbru our the euetal earh whe the robablty of eeg oly oe re le tha oe. The ae re dero reult hold f the earh beoe oy - ouer do ot kow how ay re uote they wll ee wth a gve earh. Burdett ad Judd alo fd a ae of re dero a ore otraed oeuetal earh. I th tye of all or othg tye of earh, ouer tally have to dede how ay re uote to reeve before ay a be oberved. A re dero eulbru ext whe the robablty of a ouer eeg oly oe re le tha oe but the robablty of eeg oe or two re exatly oe. -. Motvato Butter 977, Vara 980, ad Burdett ad Judd 98 th thrd la of odel have tarted how fr ater to ouer havg dfferet ex ot forato. owever, a ltg ot thee odel that ouer are aued to have the ae valuato for the good or erve. Th aer wll exltly exlore how fr wll 6

46 attet to dere re wth dfferg ouer valuato ad forato level. 6 I wll develo a gae-theoret odel fatorg both a dfferee of ouer valuato ad aout of forato reeved by ouer. A th odel develoed, the arle dutry rovde a exellet otvato develog the odel. Certa bue traveler ay be wllg to ay uward of everal te the value of the lowet ale re bought by leure traveler. Yet, both tye of ouer ould be ttg ext to eah other oah. Th wde valuato of arle erve by ouer alo aoaed by rad re wg wth the dutry. gure 8 5 are arle oe way route re data take fro a te eret rado ale of Data Bak a the eod uarter of 995. oud-tr tket are deooed to oe-way fare for eae of oaro. The fgure are draw ug a kerel dety wth the Eaehkov ethod wth the otal badwth. Note that there are ultle ode ot of the fgure. gure 0, for tae, how four ajor ode o the oe way tket re betwee Wahgto oald eaga Natoal Arort ad New York aguarda Arort. Meaol-St. Paul Iteratoal Arort to Chago O are Iteratoal Arort alo how four ode gure 9. Soete the dety aroahe zero betwee ode a gure a how o the 6 Salo 977 develoed a odel fatorg re drato ad dero for a ooolt. owever, ouer were oly dfferetated ther ot of earh ad ot of ther uderlyg valuato for the good. ob 98 develo a elaborate ult-fr re dero odel wth dfferet ouer earh ot, but aga there ot a deedee betwee the ot of earhg ad rvate valuato. Weeth 98 develo a odel loet to the objetve of th odel. e further develo uo Salo by geeralzg the ooolt odel to lude a jot dtrbutoal futo g, v ag over all ouer. I h aer the ouer ot to earh ad v ouer valuato. Weeth fd odto h odel geeratg re dero, but aga thee reult oly hold for the ooolt. 7