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Network Effects of Air Travel Demand, Second Version

Author

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  • Yanhao Wei

    (Department of Economics, University of Pennsylvania)

Abstract

As demand increases, airline carriers often increase flight frequencies to meet the larger flow of passengers in their networks, which reduces passengers' schedule delays and attracts more demand. Focusing on the “network effects", this paper develops and estimates a structural model of the U.S. airline industry. Compared with previous studies, the model implies higher cost estimates, which seem more consistent with the unprofitability of the industry; below-marginal-cost pricing becomes possible and appears on many routes. I also study airline mergers and find that the network effects can be the main factor underlying their profitability.

Suggested Citation

  • Yanhao Wei, 2014. "Network Effects of Air Travel Demand, Second Version," PIER Working Paper Archive 14-041, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 17 Nov 2014.
    • Handle: RePEc:pen:papers:14-041
    as

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    File URL: https://economics.sas.upenn.edu/sites/default/files/filevault/14-041.pdf
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Network effects; airline networks; differentiated product markets; airlines; merger;
    All these keywords.

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L93 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Air Transportation
    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • C31 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models; Quantile Regressions; Social Interaction Models

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