Essays in Empirical Industrial Organization of US Domestic Airline Industry

114 Pages·2014·1.24 MB·English

Essays in Empirical Industrial Organization of US Domestic
Airline Industry
Dissertation
Presented in Partial Fulfillment of the Requirements for the Degree
Doctor of Philosophy in the Graduate School of The Ohio State
University
By
Chiranjit Kundu, B.Com, M.A., M.A.
Graduate Program in Economics
The Ohio State University
2014
Dissertation Committee:
Matthew S Lewis, Co-Advisor
Maryam Saeedi, Co-Advisor
Huanxing Yang
(cid:13)c Copyright by
Chiranjit Kundu
2014
Abstract
My dissertation research investigates a range of issues related to entry into the
US Domestic Airline Industry. First, I study the welfare consequences of unregulated
entry into domestic airline markets, and evaluate the loss of welfare due to deviation
from the first best social optimal outcome. My study shows evidence of excessive
entry mostly occurring due to the presence of more than optimal number of indirect
carriers in some of the markets. Next, I consider the alleged entry deterrence effects
of codesharing alliances by assessing the efficacy of such arrangements in preventing
the entry of low cost carriers(LCCs). Finally, I empirically investigate how such
codesharing arrangements among the incumbent carriers influence their preemptive
pricing behavior in the face of entry threats from the LCCs. The findings from these
two studies show that even though the codesharing alliances are not strong enough
as barriers to discourage the entry of LCCs, to some extent their presence soften the
aggressive pricing behavior of the incumbent airlines in anticipation of entry threats.
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This is dedicated to my parents
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Acknowledgments
I am extremely thankful to my advisor Matthew Lewis for guiding me through my
academic journey. He not only gave me the freedom to explore the field of research
and encouraged me to develop my own ability as a researcher, but also patiently
listened to my ideas and gave me helpful suggestions. Matt has read several drafts
of my paper and given me insightful comments to strengthen the arguments and
improve my writing. As his student I have benefitted from the classes in empirical
industrial organization and also in the capacity of his grader I had the opportunity of
attending his lectures on advanced industrial organization at the undergraduate level.
His solid understanding of the subject matter and intuitive thinking helped me in the
idea-generation process and in the actual implementation in my research. Without
his constant support and advice I could not have completed this dissertation.
I am also indebted to my co-advisor Maryam Saeedi for making important sug-
gestions at the crucial stage of my job market paper. The thoughtful discussions we
had during the seminar course, helped me to give a more concrete form to my job
market paper. It was a valuable opportunity to discuss my work with her in the last
two years of my research and I am grateful to her for coordinating with me in spite
of the time constraints.
I am grateful to Huanxing Yang, David Blau, Lucia Dunn and Bruce Weinberg
for their helpful suggestions and comments that has enriched my work. My sincere
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thanks also go to Stephen Cosslett, Robert DeJong, John Kagel, Dan Levin, James
Peck, and Lixin Ye for their teaching and invaluable guidance that prepared me to
develop my skills in econometric tools and game theory.
As an empirical researcher, assistance from the technical team is indispensable
and I am thankful to Paul Pelfrey and John David Slaughter for always being there
to resolve any issues we faced related to the use of technology. The support of our
entire administrative team is invaluable and I would extend my thanks to Richard
Corley and Ricky Tobin who helped me meet official deadlines on some important
occasions.
I am extremely grateful to all my professors at Jawaharlal Nehru University, New
Delhi, for enriching my academic experience during the two years masters program
in Economics. I would like to take this opportunity to thank Satish Jain, Anjan
Mukherjee, Sugato Dasgupta, Krishnendu Ghosh Dastidar and Subrata Guha for be-
ing such excellent academic mentors whose dedication towards teaching and research
became a source of inspiration for me.
Iowethankstoallmyfriends, colleaguesandtheextendedsocialnetworkwithout
whom I could not have lived in a foreign country away from my family. I found
discussion with Kerry Tan especially on the DB1B data set and certain aspects of
the airline industry useful for my work. I am also grateful to Chao Yang for her help
with improving the efficiency of programming for a certain section of my job market
paper.
No words would be sufficient to thank my father Chinmoy Kundu and my mother
Dipa Kundu, who with their unconditional love and support made it possible for me
to come this far. They remain a constant source of encouragement for me, motivating
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me to face all challenges and to continue to put in my best efforts to achieve my goals.
I am also extremely grateful to my larger family for standing beside us whenever we
needed them.
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Vita
June 17, 1983 ...............................Born - Calcutta, West Bengal, India
2005 ........................................Bachelors of Commerce, University of
Calcutta
2007 ........................................M.A. in Economics, Jawaharlal Nehru
University, New Delhi, India
2009 ........................................M.A. in Economics, The Ohio State
University, Columbus, Ohio, USA
2009-2014 .................................. Graduate Teaching Associate,
The Ohio State University.
Fields of Study
Major Field: Economics
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Table of Contents
Page
Abstract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ii
Dedication . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iii
Acknowledgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iv
Vita . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vii
List of Tables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . x
List of Figures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xii
1. The Welfare Effects of Free Entry in the presence of Product Differentia-
tion: Evidence From The US Domestic Airline Industry . . . . . . . . . . 1
1.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Related Works . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.3 Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
1.3.1 Demand Model . . . . . . . . . . . . . . . . . . . . . . . . . 9
1.3.2 Supply and Entry . . . . . . . . . . . . . . . . . . . . . . . 14
1.4 Data and Sample Selection . . . . . . . . . . . . . . . . . . . . . . 20
1.4.1 Construction of Sample . . . . . . . . . . . . . . . . . . . . 22
1.5 Identification, Estimation and Results . . . . . . . . . . . . . . . . 24
1.5.1 Demand Model . . . . . . . . . . . . . . . . . . . . . . . . . 24
1.5.2 Supply and Entry . . . . . . . . . . . . . . . . . . . . . . . 27
1.5.3 Optimal Market Configuration . . . . . . . . . . . . . . . . 31
1.6 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
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2. Does Strategic Alliance Dissuade Entry: Evidence from US Domestic Air-
line Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
2.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
2.2 Literature Review . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
2.3 Summary of the Codesharing Practice . . . . . . . . . . . . . . . . 52
2.4 Empirical Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
2.5 Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
2.6 Estimation and Identification . . . . . . . . . . . . . . . . . . . . . 64
2.7 Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
2.7.1 Effect of the presence of Strategic Alliances on Entry . . . . 70
2.8 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
3. Empirical Investigation into the Preemptive Price Response of Incumbent
Firms in the presence of Strategic Alliances . . . . . . . . . . . . . . . . 77
3.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
3.2 Motivation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
3.3 Related Literature . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
3.4 Data and Sample Selection . . . . . . . . . . . . . . . . . . . . . . 83
3.5 Empirical Specification and Estimation . . . . . . . . . . . . . . . . 86
3.6 Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
3.7 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
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