Airline Economics: An Empirical Analysis of Market Structure and Competition in the US Airline Industry

88 Pages·2017·2.514 MB·English

by  Giovanni Alberto Tabacco (auth.)

Airline Economics
GiovanniAlbertoTabacco
Airline Economics
An Empirical Analysis of Market Structure
and Competition in the US Airline Industry
GiovanniAlbertoTabacco
SwanseaUniversity
Swansea,UnitedKingdom
ISBN978-3-319-46728-3 ISBN978-3-319-46729-0(eBook)
DOI10.1007/978-3-319-46729-0
LibraryofCongressControlNumber:2016951951
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Specialthanks to Godthrough ourLordJesus Christ forthe giftof my
life,for beingbesideto me, and to usall, in everymomentalso inthe
most difficultone;and thanks forthe joy andserenity ofdiscovering,
stepbystep,theultimategoalofourlifeonearth:todiscoverGod’slove
and forgiveness foreach humanbeing regardlessof what we do.
P
REFACE
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 mono-
graphconsists ofthree essay-style empiricalchapters.
Afteranintroductorychapter,Chap.2proposesempiricalevidencethat
theindustryisanaturaloligopoly:eachairlinemarketisdominatedbyone
tothreeairlinecarriers,regardlessofmarketsize.Furthermore,Idevelop
an econometric model of entry and market structure to explain the eco-
nomicdrivingforcesthatmakeairlinecitypairmarketsnaturaloligopolies.
Estimates suggest evidence that a 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, and hence concentration,
declines.Inotherwords,airlinecarriers,throughincreasingthenumberof
origin and destination points of each city pair market, bring about a very
concentrated market structure. To the best of my knowledge, this is the
first piece of empirical evidence on airline markets as natural oligopolies.
In addition, this result helps to reveal the nature of the competitive
process; city pair markets as natural oligopolies are consistent with airline
carriers competing in terms of quality dimensions. It therefore helps to
identify the nature of the competition models within the airline industry,
showing the crucial role played in customer decision-making by service
quality.
InChap.3,Iperformanempiricalanalysistoexplainthedeterminants
offirmnumbersandfirms’marketshareasymmetry.Lookingseparatelyat
the two main dimensions of market concentration allows me to uncover
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viii PREFACE
information about the competitive process which may have remained
hidden if an investigation was confined solely to the number of firms.
Econometricestimatesindicatethatthenatureofcompetitionisdifferent
in markets containing large hub airports; in particular, the evidence is
suggestive of tougher product-market competition in those city pairs
with largehubairports andwhich containtop airlines.
InChap.4,Iimplementagame-theoreticeconometricmodelofmarket
structure and entry with the following objective: to attempt an empirical
testformarket-sharingagreements.Inparticular,Iaimtogaininsightson
entrydecisionsoflegacyaswellasregionalairlinesintocitypairs,therefore
offering an explanation of market structure. The empirical evidence sug-
gests that airline carrier’s own airport presence increases city pair market
profitability. The empirical analysis also addresses whether or not airline
carriers deliberately prevent head-to-head competition within city pair
markets. In other words, the hub and spoke model adopted in the USA
may be used as a device to strategically prevent or lessen competition in
city pair markets. The gathered evidence is partly consistent with the
strategicbehaviourofairlinecarriersinestablishingmarket-sharingagree-
ments. This chapter, again to the best of my knowledge, represents the
firstattempttoempiricallyinvestigatethisphenomenonofmarket-sharing
agreements. Finally, Chap. 5 summarizes the main results and suggests
some directionsforthe future potentialexpansion ofthisresearch.
A
CKNOWLEDGEMENTS
Firstofall,Iwouldliketoexpressgratitudetotwoanonymousrefereesfor
their valuable comments and helpful suggestions which have greatly
improved this research monograph, and also to give a big thank you to
the editors, in the persons of Laura Pacey, for great support and encour-
agement,andAmberHusain,forefficientandhelpfuleditorialassistance.
During the journey of this research project, from developing the
research idea to its completion, I have been helped by many people.
First of all, I owe gratitude to several colleagues: Steve Davies and Bruce
Lyons, for valuable discussions, suggestions and encouragement; and
FrancoMariuzzo,forprecioussuggestionsandextremelyhelpfulinsights
oneconometric issuesrelated to Chap.4 ofthisresearch monograph.
In travelling to conferences I have had the privilege not just to benefit
from thoughtful comments and suggestions, but also, more importantly,
to meet, even for only a few days, gracious people like Ivan Barreda-
Tarrazona, Roberta Longo, Laura Rondi, Neil Gandal, Regine Oexl,
Andrea Conte, Bradley Ruffle, Letizia Giorgetti, Quazi Shahriar, Claudio
Panico,EmanueleTarantino,TheresaVeer,MartinaSartori,FedericoEtro,
Emanuele Forlani, Georgi Burlakov, Lapo Filistrucchi, David Henriques,
ClaudioPiga,TomBarbiero,MarcoAlderighi,AlbertoGaggero,Gianluigi
Pelloni,JoannaPoyago-TheotokyandMiguelFlores.
Life along my academic endeavour for the research embodied in this
book has been illuminated by friendships that have endured since my
earliest studies. I am grateful to Rod, Mark, Olivier, Sabrina, Okan,
Fabiola,Jesus, Chris,Luca,Peter,KeyandFederica.Also,morerecently,
my journey has been made much more joyful and rich than it could have
ix
x ACKNOWLEDGEMENTS
been thanks to both close friendships and more occasional relations and
interactions, with the following: Stephen and Chiyuki, Fr. Mark, Tony,
Marcelo,Marion,Fabio, Fan, Daniel,Carlo, Paul,Eowyn, Samsoh, Luis,
Katerina, Hope, Alimi, Gabor, Hoy, Sam and Ken, Hassan, Davide,
Kathy,Mario, Fr.Carlito,Kevin andGiulia.
Finally,Ithankmyfamilyforalltheirlove,financialandmoralsupport
and encouragement and also for their trust in me. I wish to dedicate this
researchmonographtomyparents,andinparticulartothememoryofmy
dear father,Alberto.
C
ONTENTS
1 Introduction 1
References 4
2 AirlineCityPair Markets asNaturalOligopolies 7
2.1 Introduction 7
2.2 Data 8
2.2.1 Coverage ofthe Sample 8
2.2.2 Airports/Cities 9
2.2.3 Airlines 10
2.2.4 City Pairs 11
2.2.5 Variables 13
2.3 Empirical Analysis 14
2.3.1 NaturalOligopoly 14
2.3.2 MonopolyCity Pair Markets 24
2.4 Discussion 26
2.5 Conclusion 29
Notes 29
References 31
3 Market Size,Firm NumbersandMarket Share Asymmetry 35
3.1 Introduction 35
3.2 Related Literature 36
3.3 Data 37
3.4 Econometric Evidence 38
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