The evidence and discussion provided in this report focus
on the appropriate elasticities for the route, national and
supra-national level of aggregation.
The Interaction between Own-Price
and Cross-Price Elasticites
In each of the five levels of aggregation, different
cross-price elasticities exist, reflecting the availability of
substitute options. For example:
• At the price class level, an increase in the full economy
price could increase the demand for both business
class tickets and discount tickets.
• At the airline level, a unilateral increase in the travel
price of one particular airline on a route can increase
the demand for other carriers on the route (and the
demand for connecting alternatives).
• At the route level, an increase in the price of travel
from London Heathrow to Paris CDG can increase the
demand for travel on London Gatwick to Paris CDG or
London Heathrow to Paris Orly.
• At the national level, an increase in the price of air
travel to/from a given country may increase demand
for air travel to/from other countries.
• At the supra-national level, an increase in the price
of air travel to/from a particular region may increase
demand for air travel to/from other regions (e.g.
an increase in the cost of air travel to the EU may
increase demand for air travel to the US).
• At all levels of aggregation, there may exist cross
elasticity effects with other modes of transport. An
increase in the price of air travel may increase demand
for ground transportation and vice versa.
• There may also be cross elasticity effects between
air travel and other leisure or consumption activities.
In some cases it may not exist at all (e.g. there is
generally no substitute for air travel on long-haul
routes).
The own price elasticity at one level of aggregation can
reflect both the own price and cross price elasticities
at other levels of aggregation. For example, the price
elasticity at the route level is a function of the own
price and cross price elasticities at the price class
and carrier levels of aggregation6 . The interaction
between these effects adds significant complexity to
the analysis, requiring clarity on which own price and
cross price elasticity were measured and controlled for.
For example, an analysis of route-level elasticities which
does not control for route substitution effects may be
more appropriate for a national-level elasticity.