Airline Economics: An Empirical Analysis of Market Structure by Giovanni Alberto Tabacco

By Giovanni Alberto Tabacco

This ebook provides an unique empirical research of the industry constitution of airline urban pair markets, laying off new mild at the workings of aggressive strategies among companies. analyzing a cross-section people airline urban pairs, Tabacco proposes for the 1st time that the will be understood as a usual oligopoly, each one airline industry being ruled by way of one to 3 airline vendors despite industry dimension. the writer questions the level to which airways intentionally hinder head-to-head pageant inside of urban pair markets, and attracts exciting conclusions approximately aggressive forces from the saw marketplace constitution. Uncovering many of the major company techniques of the airline undefined, the publication is of fast relevance to managers and practitioners, in addition to educational economists.

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This empirical evidence confirms previous literature that airport presence constitutes an important factor of airline city pair’s profitability. Looking at the estimated marginal effects of rivals’ airport presence, for American’s entry function it reveals evidence of negative impact on profits for Southwest, Continental, United Airlines, Northwest and non-leaders. In the case of Delta’s entry function, the evidence suggests negative and significant marginal effects only for non-leader airlines. 29 661 (8) Non-leaders 2 AIRLINE CITY PAIR MARKETS AS NATURAL OLIGOPOLIES 23 24 AIRLINE ECONOMICS marginal effects for Continental, United and non-leaders.

That context is identified, for example, by the restaurant industry. Indeed, Berry and Waldfogel (2010) finds that this industry fragments as market size increases and restaurant firms provide distinct products in terms of quality. Clearly, serving better (and so higher-quality) food implies investments in variable costs. The empirical analysis provided in this chapter is suggestive of evidence that the structure and behaviour of our industry is best explained by the early vertical product differentiation literature (Gabszewicz and Thisse 1979, 1980; Shaked and Sutton 1982, 1983).

First, there can be a size effect: tourist and large hub markets may have size which could not be represented by just the product of populations of endpoint cities, therefore these dummies control for the possible bias of our market size measure. In addition, in these markets there may be a difference in the nature of competition. In particular, tourist markets may be characterized by tougher price competition since demand can be much more elastic, making price undercutting more profitable. These two effects determine coefficient’s sign in opposite directions.

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