Modeling technology changes in air transport in the presence of a market shock: A passenger-based analysis

This paper proposes a formal model to assess the introduction of hydrogen technology in the air transport sector when the initial market is uncovered, a situation relevant to the current COVID-19 crisis. The "flight shame"movement causes some passengers to leave the market while allowing for some willingness-to-pay for cleaner technologies. Starting from a horizontally differentiated duopoly between airlines with old technology and an uncovered market, the introduction of hydrogen technology provides the opportunity for vertical differentiation in line with the increased environmental consciousness of passengers. The principal methodological novelties start from an uncovered market and combine horizontal and vertical differentiation. The main results are the airlines' optimal strategy sets and the adoption strategy dynamics with an increased valuation of quality by passengers. We justify a regulator's intervention and draw several potential policy implications from this dynamic, such as a minimum subsidy level and educational advertising.