Airline economics : an empirical analysis of market structure and competition in the US airline industry

This book presents an original empirical investigation of the market structure of airline city pair markets, shedding new light on the workings of competitive processes between firms. Examining a cross-section of US airline city pairs, Tabacco proposes for the first time that the industry can be understood as a natural oligopoly, each airline market being dominated by one to three airline carriers regardless of market size. The author questions the extent to which airlines deliberately prevent head-to-head competition within city pair markets, and draws intriguing conclusions about competitive forces from the observed market structure. Uncovering some of the main corporate strategies of the airline industry, the book is of immediate relevance to industry managers and practitioners, as well as academic economists. Giovanni Tabacco is Assistant Professor of Economics at Swansea University School of Management, Wales. Prior to this he worked in the Economics Department of the University of Bologna, Italy. His research interests include industrial organization, experimental economics and competition policy, and competition economics Airline Economics 3 Preface 6 Acknowledgements 8 Contents 10 List of Figures 12 List of Tables 13 1 Introduction 14 References 17 2 Airline City Pair Markets as Natural Oligopolies 19 2.1 Introduction 19 2.2 Data 20 2.2.1 Coverage of the Sample 20 2.2.2 Airports/Cities 21 2.2.3 Airlines 22 2.2.4 City Pairs 23 2.2.5 Variables 25 2.3 Empirical Analysis 26 2.3.1 Natural Oligopoly 26 2.3.2 Monopoly City Pair Markets 36 2.4 Discussion 38 2.5 Conclusion 41 Notes 41 References 43 3 Market Size, Firm Numbers and Market Share Asymmetry 47 3.1 Introduction 47 3.2 Related Literature 48 3.3 Data 49 3.4 Econometric Evidence 50 3.4.1 Firm Numbers 50 3.4.2 Market Share Asymmetry 52 3.5 Discussion 55 3.6 Conclusion 57 Notes 57 References 58 4 Entry and Market-Sharing Agreements in the U.S. Airline Industry 61 4.1 Introduction 61 4.2 Related Literature 65 4.2.1 Relationship between MMC and Collusion 65 4.2.2 Empirical Models of Entry and Market Structure 66 4.3 Data 69 4.4 Econometric Evidence 70 4.4.1 Results 73 4.5 Conclusion 79 Notes 81 References 81 5 Conclusion 84 5.1 Summary of Results 84 5.2 Directions for Future Research 85 Reference 86 Index 87 Front Matter....Pages i-xv Introduction....Pages 1-5 Airline City Pair Markets as Natural Oligopolies....Pages 7-34 Market Size, Firm Numbers and Market Share Asymmetry....Pages 35-48 Entry and Market-Sharing Agreements in the U.S. Airline Industry....Pages 49-71 Conclusion....Pages 73-75 Back Matter....Pages 77-78