Here are the results from a session of the IO game:

In this game, the two last years highlight the impact of (vertical, here) differentiation on profits. On all markets except the “yellow” one, both airlines follow the same low cost strategy. On the yellow market, one airline follows a low cost strategy (with a few very big planes and very little space between seats) while the other one operates many small planes with more space between seats.

We have another illustration taken from another game:

Here again, the two airlines choose to maximize vertical differentiation: The first airline selects only one big plane with very little space between seats, while the second operates 4 flights on very small planes and with the maximum space between seats.

The low cost airline has a low price and attracts many customers among leisure passengers but very few business passengers. These passengers are putting more value on flight frequencies and on comfort and most of them prefer using the second airline, in spite of its much higher fares.

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