Association for Public Policy Analysis & Management

Hidden city ticketing occurs when an indirect flight from city A to city C through connection node city B is cheaper than the direct flight from city A to city B. Then passengers traveling from A to B have an incentive to purchase the ticket from A to C but get off the plane at B. In this paper, I build a structural model to explain the cause and impact of hidden city ticketing. I collect empirical data from the Skiplagged webpage and apply global optimization algorithms to estimate the parameters of my model. I also conduct counterfactual analysis to shed some light on policy implications. I find that hidden city opportunity occurs only when airlines are applying a hub-and-spoke network structure, under which they intend to lower their flying costs compared to a fully connected network. I find that in the short run, hidden city ticketing does not necessarily decrease airlines' expected profits. Consumer welfare and total surplus always increase. In the long run, the welfare outcomes become more complicated. For some routes airlines have the incentive to switch from hub-and-spoke network to a fully connected one when there are more and more passengers informed of hidden city ticketing. During this process, firms always result in lower expected revenue, while consumers and the whole society are not necessarily better off.