The effect of service quality and price on international airline competition

Abstract

A game theoretic model, integrated with passenger's international choice behavior, for the competition between international airlines is developed and used to identify the role of competing service quality. The empirical evidence suggests that safety, convenience and service quality have a major influence on the choice decision of air passengers. Passengers respond strongly to decreases in price, increased safety, service comprehensiveness and increases in convenience. In a Cournot model, airlines are predicted to increase service quality, with China Airlines, a dominant carrier, the winner on safety and service quality. Foreign companies are beneficiaries in providing convenient service quality. In a Stakelberg model, all the airlines will increase safety and diversify service quality to a reference point. Foreign airlines will additionally be winners in safety and convenience, and China Airlines will be a winner in diversifying service quality. This research can be used to assist airline companies in identifying the role of quality of service in the aviation market as a whole, adding competitive advantage to their business. © 2007 Elsevier Ltd. All rights reserved.