Route
Level.
The review of previous research found route
level elasticities ranging from -1.2 to -1.5. Regressions
using the US DB1A data, which allows the use of route
dummies and variables to capture the price of route
substitutes, produced a similar air travel price elasticity
of -1.4. This elasticity estimate is applicable to a situation
where the price of an individual route changes (e.g.
higher airport charges at Paris CDG raising the price of
travel from London and diverting leisure traffic to another
destination, such as Frankfurt). Using distance as an
instrument variable within the 2SLS model produces
results that further support this elasticity, though there
still is some concern over the use of distance in this way
due to its perceived exogenous influence on demand.