ITLS - WP - 06 - 01 The Effect of Service Quality and Price on International Airline Competition

A game theoretic model, integrated with passenger’s international choice behaviour, 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, 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 with China Airlines a winner in diversifying service quality. This research can be used by the airline companies as a reference for making tactical decisions and gaining a competitive advantage in the air transportation market. By this, we can raise the quality of service of the aviation market as a whole and deliver a win-win situation to all stakeholders.