Allocating Capacity Among Quality Differentiated Products: Evidence From Airline Industry

Abstract

Prior analytical literature has shown that the capacity-allocation decisions depend on the quality differentiation and the resource consumptions of products. However, there has been no empirical investigation on this topic in vertically differentiated markets. In this article, the authors investigate the airline industry in three regions of the world; Asia Pacific, Europe, Middle East, and Africa, and North America. They explore how the customer perceived quality and the resource-consumption differences of the products may affect the capacity-allocation decisions. They find that both attributes have a significant impact in all the regions, yet at a different scale in each region.

Keywords:

• product-line design
• segmentation
• resource allocation
• operations-marketing interface

Notes

1. There are different dimensions of quality such as performance, design, reliability, conformance, durability, serviceability, aesthetics, and perception (cf. Deming, 1986; Juran, 1988). Note that we focus on the customer perception dimension of quality in this article.

2. If, for example, there were only one airline in an OD pair at a given time, that airline would have 100% market share, and the HHI would equal 1, indicating a monopoly. Or, if there were thousands of airlines competing, each would have nearly 0% market share, and the HHI would be close to zero, indicating a nearly perfect competition.

3. Note that we only compare the impact, |β₄ |, by observation; and no statistical tests are run to look for statistical significance of the difference in regions.