IDEAS home Printed from https://ideas.repec.org/p/auc/wpaper/191.html
   My bibliography  Save this paper

The Smoking Gun? Competition and Predation in the Trans-Tasman Air Travel Market

Author

Listed:
  • Hazledine, Tim
  • Green, Hayden
  • Haugh, David

Abstract

This paper proposes and demonstrates a new method for testing for predatory behavior by incumbent oligopolists towards new entrants. Traditional tests for predation, such as the Areeda-Turner Rule, focus on the level of price relative to average variable cost, such that if P %3C AVC, the incumbents cannot be maximising profits even over the short run, and so are predating. The obvious objection to these tests (apart from difficulties in measuring variable costs) is that just about all oligopoly models predict that price will fall after the entry of an additional competitor: who is to say that even an unsustainable price cut is not just the natural outcome of the market becoming structurally more competitive? We answer this objection by taking the modelling one level deeper. We ask what type of oligopoly 'game' is being played in the market post-entry, and compare it with the pre-entry game. If oligopoly behavior changes substantially in the direction of becoming more 'competitive', then we may have found a 'smoking gun' circumstantial evidence pointly strongly towards predation (but falling short of directly incriminating evidence, such as records of email conversations indicating intent to predate). Our approach is implemented with data on the two million annual flights across the Tasman Sea that separates the main cities of New Zealand and Australia. The market has long been dominated by a duopoly of national carriers -- Air New Zealand and Qantas -- who for about a year in 1995/96 faced competition from a new-firm entrant, Kiwi International Airlines. We find that the incumbents' behavior pre-entry was quite close to Cournot-Nash, but that it became much more competitive during the period of triopoly competition, suggesting predation. After the exit of Kiwi, behavior immediately became less competitive, but it did not return to pre-entry levels, and indeed has more recently tended back towards less cooperative duopoly pricing, perhaps to discourage any other new or existing airline from again disturbing the market.

Suggested Citation

  • Hazledine, Tim & Green, Hayden & Haugh, David, 2003. "The Smoking Gun? Competition and Predation in the Trans-Tasman Air Travel Market," Working Papers 191, Department of Economics, The University of Auckland.
  • Handle: RePEc:auc:wpaper:191
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/2292/191
    Download Restriction: no
    ---><---

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Hazledine, Tim, 2006. "Pricing and Competition in Australasian Air Travel Markets," Working Paper Series 3840, Victoria University of Wellington, The New Zealand Institute for the Study of Competition and Regulation.
    2. Hazledine, Tim, 2006. "Pricing and Competition in Australasian Air Travel Markets," Working Paper Series 18935, Victoria University of Wellington, The New Zealand Institute for the Study of Competition and Regulation.
    3. repec:vuw:vuwscr:18931 is not listed on IDEAS
    4. repec:vuw:vuwscr:18935 is not listed on IDEAS
    5. Hazledine, Tim, 2006. "Competition Policy for the Trans-Tasman Air Travel Market: the 2005 ACT Decision and its Implications," Working Paper Series 3836, Victoria University of Wellington, The New Zealand Institute for the Study of Competition and Regulation.
    6. Hazledine, Tim, 2006. "Competition Policy for the Trans-Tasman Air Travel Market: the 2005 ACT Decision and its Implications," Working Paper Series 18931, Victoria University of Wellington, The New Zealand Institute for the Study of Competition and Regulation.

    More about this item

    Keywords

    Economics;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:auc:wpaper:191. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Library Digital Development (email available below). General contact details of provider: https://edirc.repec.org/data/deaucnz.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.