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When Do Firms Offer Higher Product Quality? Evidence from the Allocation of Inflight Amenities

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Document pages: 30 pages

Abstract: We examine how competition impacts the provision of product quality. Using a unique data set of inflight amenities provided by U.S. airlines, we find that the composition of competition matters with significantly higher product quality (Wi-Fi, entertainment, and power) on more competitive routes (with lower HHI). The presence of Southwest Airlines on the route, however, is shown to reduce product quality offerings. We also find significantly higher product quality on routes with more passengers, tourist destinations, and red-eye flights. On the most competitive routes carriers are more likely to indicate the presence of Wi-Fi first and later on reverse it when getting closer to departure. We also examine airline pricing of inflight amenities which serve as additional revenue streams for carriers. We find that carriers have lower posted base ticket prices on routes with Wi-Fi and entertainment while offering a la carte pricing for these amenities.

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