DEMAND, MARKET STRUCTURE, ENTRY, AND EXIT IN AIRLINE MARKETS by DANIEL M

99 Pages·2014·0.53 MB·English

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DEMAND, MARKET STRUCTURE, ENTRY, AND EXIT IN AIRLINE MARKETS

by

DANIEL M. MAHONEY

A DISSERTATION

Presented to the Department of Economics
and the Graduate School of the University of Oregon
in partial fulfillment of the requirements
for the degree of
Doctor of Philosophy

June 2014
DISSERTATION APPROVAL PAGE

Student: Daniel M. Mahoney

Title: Demand, Market Structure, Entry, and Exit in Airline Markets

This dissertation has been accepted and approved in partial fulfillment of the
requirements for the Doctor of Philosophy degree in the Department of Economics by:

Wesley W. Wilson Chairperson
Van Kolpin Core Member
Anca Cristea Core Member
Diane Del Guercio Institutional Representative

and

Kimberly Andrews Espy Vice President for Research and Innovation;
Dean of the Graduate School

Original approval signatures are on file with the University of Oregon Graduate School.

Degree awarded June 2014
ii
© 2014 Daniel M. Mahoney

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DISSERTATION ABSTRACT

Daniel M. Mahoney

Doctor of Philosophy

Department of Economics

June 2014

Title: Demand, Market Structure, Entry, and Exit in Airline Markets

The airline industry is a major driver of economic activity in the United States,
accounting for over $1 trillion annually. In this work, I study the airline industry and
analyze several key economic issues facing the industry. I examine the industry from
several different angles, looking at consumer behavior, firm behavior, and market
performance. The body of the dissertation comprises three essays, with each essay
focusing on one of the aforementioned facets of the industry.
The first essay is a study of consumer demand, using aggregate data to estimate
consumer utility functions and identify preferences for airports in large, multi-airport
markets. Using these utility functions, I produce tables of cross-airline and cross-airport
elasticities, measuring how consumers would be expected to substitute between airports
in response to airline price increases and substitute between airlines in response to airport
price increases. The second essay is a study of market structure and pricing. I look at
changes in market structure over a 20 year time period, focusing on the price effects of
entry, exit, and mergers. By looking at both the direct effects as well as the subsequent
effects on market concentration, I find that there is tremendous heterogeneity in the
effects of these events across markets. The final essay is a model of firm entry and exit
decisions in a network environment. I use this model to analyze firm decisions in the
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airline industry. I find that the size and geographic distribution of firms' networks plays
an important role in their decision to further expand or contract, as firms with larger
networks are more likely to expand, while firms with smaller networks are more likely to
contract. Together, this body of work presents an in-depth analysis of the economic
issues surrounding the airline industry.
This dissertation includes both previously published and co-authored material.

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CURRICULUM VITAE

NAME OF AUTHOR: Daniel M. Mahoney

GRADUATE AND UNDERGRADUATE SCHOOLS ATTENDED:

University of Oregon, Eugene, OR
Brown University, Providence, RI

DEGREES AWARDED:

Doctor of Philosophy, Economics, 2014, University of Oregon
Master of Science, Economics, 2012, University of Oregon
Bachelor of Science, Mathematics, 2007, Brown University

AREAS OF SPECIAL INTEREST:

Industrial Organization

PROFESSIONAL EXPERIENCE:

Graduate Teaching Fellow, University of Oregon, 2009-2014

Summer Assistant Janitor, Williamsburg Elementary School, 2006-2007

GRANTS, AWARDS, AND HONORS:

Academic All-Ivy, 2007

PUBLICATIONS:

Mahoney, Dan, and Wesley W. Wilson. "The Size and Growth of
Airports."Advances in Airline Economics 3 (2011): 233-273.

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TABLE OF CONTENTS
Chapter Page

I. INTRODUCTION .................................................................................................... 1
II. AIRPORT AND AIRLINE SUBSTITUTION EFFECTS IN MULTI-AIRPORT
MARKETS .................................................................................................................. 5
1. Introduction ........................................................................................................ 5
2. Literature Review............................................................................................... 7
2.1. Airlines and Airports................................................................................. 8
2.2. Market Definition...................................................................................... 13
2.3. Consumer Choice ...................................................................................... 15
3. Model ................................................................................................................. 17
4. Data .................................................................................................................... 22
5. Results ................................................................................................................ 27
6. Conclusion ......................................................................................................... 32
III. MARKET STRUCTURE AND PRICES: ENTRY, EXIT, AND MERGERS
IN U.S. AIRLINE MARKETS .................................................................................... 33
1. Introduction ....................................................................................................... 33
2. Background ....................................................................................................... 35
3. Model ................................................................................................................. 37
4. Data Sources and Variables .............................................................................. 40
5. Results ................................................................................................................ 46
5.1. Regression Results .................................................................................... 47
5.2. Firm Effects .............................................................................................. 50
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Chapter Page

5.3. Market Effects ........................................................................................... 53
5.4. Cumulative Results ................................................................................... 57
6. Conclusion ......................................................................................................... 57
IV. ENTRY AND EXIT IN NETWORKED INDUSTRIES: A STUDY OF
AIRLINE MARKETS ................................................................................................. 59
1. Introduction ........................................................................................................ 59
2. Model ................................................................................................................. 62
3. Data .................................................................................................................... 67
4. Results ................................................................................................................ 71
5. Conclusion ......................................................................................................... 77
V. SUMMARY AND CONCLUSION........................................................................ 79
APPENDIX: ADDITIONAL TABLES ....................................................................... 81
REFERENCES CITED ................................................................................................ 86
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LIST OF FIGURES

Figure Page

1. Average Fares over Time ....................................................................................... 43

2. Market Concentration over Time. .......................................................................... 43

3. Codeshare Utilization over Time ........................................................................... 45
4. Price Effect of Entry over Time ............................................................................. 51
5. Price Effect of Entry .............................................................................................. 54
6. Price Effect of Exit................................................................................................. 55
7. Price Effect of Delta-Northwest Merger ................................................................ 55
8. Entries and Exits over Time ................................................................................... 69
9. Firm Network Size over Time ............................................................................... 70
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LIST OF TABLES

Table Page

1. Cities and Airports ................................................................................................. 24

2. Summary Statistics................................................................................................. 26

3. Parameter Estimates ............................................................................................... 29
4. Airport Elasticities ................................................................................................. 30
5. Exit Shares ............................................................................................................. 31
6. Airline Mergers ...................................................................................................... 42
7. Summary Statistics................................................................................................. 46
8. Regression Results ................................................................................................. 47
9. Merger Coefficient Estimates ................................................................................ 52
10. Price Effects Due to Change in Market Concentration .......................................... 56
11. Cumulative Effects................................................................................................. 57
12 Summary Statistics................................................................................................. 72
13. Entry Model Results .............................................................................................. 73
14. Exit Model Results ................................................................................................. 75
15. Entry & Exit Combined Results ............................................................................ 76
16. New York City Elasticities .................................................................................... 81
17. Washington, DC Elasticities .................................................................................. 82
18. Chicago Elasticities ................................................................................................ 82
19. Dallas Elasticities ................................................................................................... 83
20. San Francisco Elasticities ...................................................................................... 83
21. Los Angeles Elasticities ......................................................................................... 84
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