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On sources of market power in the airline industry: Panel data evidence from the US airports

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  • Bilotkach, Volodymyr
  • Lakew, Paulos Ashebir

Abstract

A firm can obtain market power through its dominant position on the product market, or via control of a key resource. In particular, it has been argued that airport dominance is a more important source of market power in the US airline industry than route dominance. We examine this contention by analyzing a seventeen-year panel of airport-level prices in the United States. We demonstrate that even though on average airport-level concentration appears to be the strongest source of market power, concentration on routes originating at an airport is the strongest predictor of price levels for the sub-set of large and medium hub airports. There is little evidence that either airport or route dominance significantly affect prices in the sub-sample of medium and small hub airports. There is also little evidence that an airport’s dominant carrier exerts market power beyond the level predicted by the airport or route dominance. Our results imply that consumer welfare losses due to airline consolidation can be concentrated in smaller communities, and related to changes in airport-level concentration. We provide a simple evaluation of the possible effects of two recent and one projected mergers (Delta-Northwest, United-Continental, and American-US Airways) in light of this finding, and suggest that the former consolidation event can potentially lead to non-trivial consumer welfare losses to travelers in over 30 small communities.

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  • Bilotkach, Volodymyr & Lakew, Paulos Ashebir, 2014. "On sources of market power in the airline industry: Panel data evidence from the US airports," Transportation Research Part A: Policy and Practice, Elsevier, vol. 59(C), pages 288-305.
    • Handle: RePEc:eee:transa:v:59:y:2014:i:c:p:288-305
    DOI: 10.1016/j.tra.2013.11.011
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    Cited by:

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    7. Oliveira, Marcus V.R. & Oliveira, Alessandro V.M., 2018. "What drives effective competition in the airline industry? An empirical model of city-pair market concentration," Transport Policy, Elsevier, vol. 63(C), pages 165-175.
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    10. Thierry Blayac & Patrice Bougette, 2023. "What can be Expected from Mergers After Deregulation? The Case of the Long-Distance Bus Industry in France," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 62(1), pages 63-97, February.
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    17. Manuela Jr., Wilfred S. & Rhoades, Dawna L. & Curtis, Tamilla, 2019. "Market power at the Seattle-Tacoma International Airport: The case of Alaska Airlines," Transport Policy, Elsevier, vol. 76(C), pages 90-99.
    18. Vaze, Vikrant & Luo, Tian & Harder, Reed, 2017. "Impacts of airline mergers on passenger welfare," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 101(C), pages 130-154.
    19. Michael O. Ball & Alexander S. Estes & Mark Hansen & Yulin Liu, 2020. "Quantity-Contingent Auctions and Allocation of Airport Slots," Transportation Science, INFORMS, vol. 54(4), pages 858-881, July.
    20. Wu, Na & Zhao, Shengchuan & Zhang, Qi, 2016. "A study on the determinants of private car ownership in China: Findings from the panel data," Transportation Research Part A: Policy and Practice, Elsevier, vol. 85(C), pages 186-195.
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    22. Tamer Cetin & Kadir Y. Eryigit, 2015. "Estimating the Economic Effects of Deregulation: Evidence from the Turkish Airline Industry," Koç University-TUSIAD Economic Research Forum Working Papers 1525, Koc University-TUSIAD Economic Research Forum.

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