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Airline Economics: An Empirical Analysis of Market Structure and Competition in the US Airline Industry / Giovanni, Tabacco
Swansea University Author: Giovanni, Tabacco
The subject of this book comprises original research about a detailed empirical investigation of market structure of airline city pair markets and competition between airline firms. The core of this research monograph consists of three essay-style empirical chapters. After an introductory chapter, c...
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The subject of this book comprises original research about a detailed empirical investigation of market structure of airline city pair markets and competition between airline firms. The core of this research monograph consists of three essay-style empirical chapters. After an introductory chapter, chapter 2 proposes empirical evidence that the industry is a natural oligopoly: each airline market is dominated by one to three airline carriers, regardless of market size. Furthermore, I develop an econometric model of entry and market structure to explain economic driving forces that make airline city pair markets as natural oligopolies. Estimates suggest evidence that rival’s airport presence lowers airline carrier’s own city pair profitability. As a result, this piece of econometric evidence indicates that city pair market’s entry hence concentration declines. In other words, airline carriers for means of enlarging number of destinations flown out of origin and destination points of each city pair market lead to a very concentrated market structure. At best of my knowledge, this is the first piece of empirical evidence on airline markets as natural oligopolies. In addition, this result helps uncovering the nature of competitive process; city pair markets as natural oligopolies are consistent with airline carriers competing on quality dimensions. Consequently, it aids identifying the competition models which represent an appropriate description of the airline industry; that is, competition models where service quality plays a crucial role. In chapter 3, I perform an empirical analysis to explain determinants of firm numbers and firms’ market share asymmetry. Looking separately at the two main dimensions of market concentration allows me to uncover information about the competitive process which may remain concealed if I was investigating only number of firms. Econometric estimates indicate that nature of competition is different in markets containing large hub airports; in particular, the evidence is suggestive of tougher product market competition in those city pairs with large hub airports and presence of top airlines.In chapter 4, I implement a game theoretic econometric model of market structure and entry with the following objective; to attempt an empirical test for market sharing agreements. In particular, I aim to gain insights on entry decisions of legacy as well as regional airlines into city pairs, therefore explaining market structure. Empirical evidence suggests that airline carrier’s own airport presence increases city pair market profitability. The empirical analysis also addresses whether airline carriers deliberately prevent competition head-to-head within city pair markets. In other words, the hub and spoke model adopted in the US may be used as a device to strategically prevent or lessen competition in city pair markets. The gathered evidence is partly consistent with strategic behaviour of airline carriers in establishing market sharing agreements. This chapter, at best of my knowledge, represents the first attempt to empirically investigate such phenomenon of market sharing agreements. Finally, chapter 5 summarises main results and point to some directions for future potential expansion of this research.
airline, market structure, competition, market sharing agreements
School of Management