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Essays in Empirical Industrial Organization of US Domestic Airline Industry PDF

114 Pages·2014·1.24 MB·English
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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. ii This is dedicated to my parents iii 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 iv 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 v 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. vi 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 vii 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 viii 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 ix

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Graduate Program in Economics industrial organization and also in the capacity of his grader I had the M.A. in Economics, Jawaharlal Nehru.
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