Hidden-City ticketing: The cause and impact

Hidden-city ticketing is an interesting airline ticket-pricing phenomenon. It occurs when an itinerary connecting at an intermediate city is less expensive than a ticket from the origin to the intermediate city. In such a case, passengers traveling to the intermediate city have an incentive to pretend to be traveling to the final destination, deplane at the connection point, and forgo the unused portion of the ticket. Hidden-city opportunities are not uncommon nowadays. In this paper, we establish a mathematical model to shed some light on the cause of hidden-city opportunities and the impact of (the passengers') hidden-city ticketing practice on both the airlines' revenues and consumer welfare. To perform our study, we adapt a network revenue management model. We illustrate that the hidden-city opportunity may arise when there is a large difference in the price elasticity of demand on related itineraries, providing a plausible explanation for this phenomenon. To show the impact of the hidden-city ticketing practice on the airlines' revenues, we first argue that when passengers take advantage of such opportunities, the airlines should react, and the optimal reaction would be to eliminate any hidden-city opportunities. However, even if the airline optimally reacts, the revenue gained is still less than the optimal revenue it could have earned if passengers did not take advantage of hidden-city opportunities. Moreover, under our model, the revenue decrease could be as much as half of the optimal revenue when passengers do not use hidden-city tickets, but it cannot be more if the airline's network has a hub-and-spoke structure. We also show that when passengers take advantage of hidden-city opportunities, the prices of certain itineraries will rise, which is a disadvantage to the passengers in the long run.