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Airline Hubs: Costs, Markups and the Implications of Customer Heterogeneity

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  • Steven Berry
  • Michael Carnall
  • Pablo T. Spiller

Abstract

This paper estimates a model of airline competition that captures the two major features of the industry: product differentiation and economies of density. The results not only provide support to some of the traditional common wisdom in the industry, but are also useful for understanding major puzzles concerning the evolution of the industry. The estimates indicate that a hubbing airline's ability to raise prices is focused on tickets that appeal to price-inelastic business travelers, who favor the origin-hub airline, even while paying an average premium of 20%. These high prices do not, however, provide a `monopoly umbrella' to other non-hub airlines. Finally, on the cost side there is evidence of economies of density (and therefore cost economies of hubbing) on longer routes. Consistent with the `Southwest Airlines' effect, there is no evidence of economies of density on shorter routes.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5561.

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Date of creation: May 1996
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Publication status: published as Lee, Darin (ed.) Advances in Airline Economics. Volume 1. Competition Policy and Antitrust. Amsterdam and San Diego: Elsevier, 2006.
Handle: RePEc:nbr:nberwo:5561

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  1. Hausman, Jerry A & Wise, David A, 1978. "A Conditional Probit Model for Qualitative Choice: Discrete Decisions Recognizing Interdependence and Heterogeneous Preferences," Econometrica, Econometric Society, Econometric Society, vol. 46(2), pages 403-26, March.
  2. Berry, Steven T, 1992. "Estimation of a Model of Entry in the Airline Industry," Econometrica, Econometric Society, Econometric Society, vol. 60(4), pages 889-917, July.
  3. Bailey, Elizabeth E & Williams, Jeffrey R, 1988. "Sources of Economic Rent in the Deregulated Airline Industry," Journal of Law and Economics, University of Chicago Press, University of Chicago Press, vol. 31(1), pages 173-202, April.
  4. Berry, Steven T, 1990. "Airport Presence as Product Differentiation," American Economic Review, American Economic Association, American Economic Association, vol. 80(2), pages 394-99, May.
  5. Reiss, Peter C & Spiller, Pablo T, 1989. "Competition and Entry in Small Airline Markets," Journal of Law and Economics, University of Chicago Press, University of Chicago Press, vol. 32(2), pages S179-202, October.
  6. Daniel McFadden, 1977. "Modelling the Choice of Residential Location," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 477, Cowles Foundation for Research in Economics, Yale University.
  7. Brueckner, Jan K. & Spiller, Pablo T., 1991. "Competition and mergers in airline networks," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 9(3), pages 323-342, September.
  8. Borenstein, Severin, 1991. "The Dominant-Firm Advantage in Multiproduct Industries: Evidence from the U.S. Airlines," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 106(4), pages 1237-66, November.
  9. Brueckner, Jan K & Spiller, Pablo T, 1994. "Economies of Traffic Density in the Deregulated Airline Industry," Journal of Law and Economics, University of Chicago Press, University of Chicago Press, vol. 37(2), pages 379-415, October.
  10. Bresnahan, Timothy F., 1989. "Empirical studies of industries with market power," Handbook of Industrial Organization, Elsevier, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 2, chapter 17, pages 1011-1057 Elsevier.
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