Back to news

Formatting exchanges, shaping markets

30 April 2013

Professor Luis Araujo of the Department of Marketing gave the keynote address at a research seminar at the University of Oulu in Finland on 24 April 2013.

The seminar, Re-focusing Marketing: Market-Shaping, was held at the Martti Ahtisaari Institute of Global Business and Economics. The title of Professor Araujo's presentation was 'Formatting Exchanges, Shaping Markets: the US airline industry 1981-1991 and the birth of Frequent Flyer programmes'.

Formatting Exchanges, Shaping Markets

Summary

The title of this presentation, based on joint work with Hans Kjellberg, of the Stockholm School of Economics, reflects a lasting concern with the troublesome relationship between exchange and markets. Over the last few decades, marketing has been increasingly associated with a generic notion of exchange, showing little or no concern for how exchanges aggregate to form markets. The notion of a market implies what the father of modern marketing, Wroe Alderson called an “organised behaviour system”, lasting beyond single exchanges. The work required to create a market as “organised behaviour system” is at the heart of this presentation. We argue that markets are the result of multiple and distributed investments that aim to create a form, a generic format for exchanges that can extend over time and space and is embedded in durable socio-material infrastructures.

We make use of the notion of investments in form, which contemplates the immobilization of resources to allow some relation to be fixed and/or reproduced over time and space (Thévenot 1984). A form is characterised by its capacity to generate temporal and spatial equivalencies, allowing us to move from the particular (e.g. an isolated exchange) to the generic (e.g. an exchange with a particular category of customers).

Our empirical focus is on the creation of new market form, frequent flyers, following the US Airline Deregulation Act of 1978. Under the previous regulatory regime, the US Civil Aeronautics Board controlled routes and prices and airlines were limited to competing on frequency and quality of service. The end result was that prices and flight frequencies were high whilst load factors (percentage of filled seats) were comparatively low. Deregulating the skies meant lower prices, higher load factors, and new entrants in the airline industry.

To conclude, we reflect on the notion of investments in form generating patterns of coordination of behaviour amongst different types of market actors, some born as a result of the development of the form. Somewhat paradoxically – at least for the airlines that invested in the new form to mitigate or avoid the commoditisation induced by the price-based competition that was supposedly ushered in by deregulation – FFPs helped create another form of commoditisation, with loyalty programmes vying to offer business customers the best set of rewards. As a result, airlines increasingly found themselves increasingly caught by the strategy that was originally intended to capture their customers’ loyalty.