Highlights • In Chile there is a dominant airline with a market share persistently above 75% for more than a decade and is the only one that has a frequent flyer program, which might exacerbate its market power. • We estimate the effect that the dominant firm’s frequent flyer program has on domestic flight tariffs in Chile. It is usually difficult to separately identify the effect of a hub premium from the effect of a frequent flyer program. However, in Chile there is only hub in the country, which is obviously the same for all airlines, there are no low-cost carriers and domestic flights do not have business class. • To identify the effect of the FFP and separate it from other non-observable characteristics of LAN flights, we look at tariffs from flights where passengers earn full miles and others where only a fraction of the total miles are accumulated. Additionally, we compare tickets on weekdays – targeted to business travellers – with tickets on weekends – targeted to tourists – in different routes where LAN faces from none to up to two competitors. For this purpose, we make use of a unique data set collected by ourselves from several airlines’ websites over two periods of 8weeks each in 2011 and 2012. • The results show that the differential premium the dominant firm is able to charge in weekday flights – targeted mostly to business travelers – due to its frequent flyer program is about 35% above its competitors’ price. This premium is obtained for an adjusted fare of the dominant firm that takes into account the benefit in terms of “extra trips” the traveler obtains by accumulating miles on the FFP. • Such a large magnitude is consistent with a domestic market with few competitors, no low cost carriers, and where only one airline has a frequent flyer program.

Abstract Frequent flyer programs create a switching cost for the consumer and allow firms to obtain rents, for example, by exploiting the principal agent problem existing between the employee who travel and purchases the ticket and the employer paying for that ticket. In Chile LAN is the dominant airline in domestic markets and the only one that has a frequent flyer program (FFP); it faces some competition from two small carriers. Using a unique dataset for Chile, collected by ourselves from airlines websites in 2011 and 2012, we estimate the impact of the dominant airline FFP. For this purpose, we compare for each route the fares between airlines and between weekday trips (that accumulate full miles and are mainly for business purposes) and weekend trips (that accumulate less than full miles and are mainly for leisure purposes). The results show that the differential premium LAN is able to charge for weekday trips due to the FFP is around 35%. Three particularities of the Chilean market help the econometric identification: there is only one hub for all airlines (the capital city of Santiago), there is no business class in domestic flights, and none of the airlines is a low-cost carrier.