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This study examines when firms offer higher product quality. We measure product quality by examining four different inflight amenities provided by airlines: Wi-Fi, seat size, entertainment, and seat power. Using daily flight level data for over 800 routes and spanning nine weeks in third quarter of 2015 we observe that carriers were actively retrofitting aircraft to expand their inflight amenity offerings. We find significantly lower product quality (Wi-Fi, entertainment, and power) on more concentrated routes. While considerable research has been done on airline pricing, less well known is how airlines pursue other revenue streams from ancillary services. Recent work by Brueckner et al. (2015) explores the role of baggage fees in airline pricing. We examine additional revenue streams provided by Wi-Fi and entertainment inflight amenities. We find that carriers are lowering the posted base ticket prices on routes with Wi-Fi and entertainment and then charging passengers for using these amenities. The IV price estimates reveal that magnitude of the posted fare reduction is larger than the additional revenue generated from the inflight amenity.

This paper highlights the widespread use of relational contracting in developed economies. While the number of empirical studies on relational practices in developing countries is increasing rapidly, evidence from industries and countries characterised by strong institutions is lagging behind due to data constraints. We argue that technological progress and strong institutions do not diminish the use of relational contracting, and use the US airline industry as a case in point. In particular, we discuss a number of factors (including transaction complexity, existence of collaborative relationships and data availability) that make this industry an ideal setting to study relational contracting in a developed economy. Moreover, we argue that other industries in developed countries share the properties of the US airline industry and, hence, can be used as a basis to investigate relational contracting in future work.