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.