AbstractThe first part of the paper develops a theoretical framework for the analysis of strategic behaviour of European low‐cost airlines that emphasises the role of product differentiation. The second part uses original survey data to assess the effectiveness of low‐cost airlines' distribution strategies. Finally, an econometric model is developed to assess the joint impact of the factors affecting the level of the fares charged by low‐cost airlines. The evidence suggests that, among other things, the highest prices normally are paid for tickets bought between 30 and 8 days before departure, and thus indicates an original pricing strategy that differentiates low‐cost airlines from traditional carriers. Copyright © 2002 John Wiley & Sons, Ltd.