Advanced Search
MyIDEAS: Login

Network Structure and Design in the Deregulated U.S. Airline Industry: an Argument for Re-Regulation?

Contents:

Author Info

  • Sayed Ajaz Hussain
  • Serkan Bahceci

Abstract

This paper develops a model to explain and analyze the evolution of network structure (connectivity)and design (flight frequency, aircraft size, prices) in the post-deregulation U.S. airline industry. We show that legacy carriers choice of Hub-and-Spoke networks and the emergence of low cost carriers (LCCs) operating Point-to-Point networks were optimal choices. We demonstrate that LCCs need not necessarily charge lower prices, and their entry impacted legacy carriers’ prices in all markets, even those where there is no direct competition. We show that in response to entry, legacy carriers optimally lower flight frequency, leading to longer wait times between flights for which passengers are compensated by lower prices; conversely, if the entrant later exits, legacy carriers raise flight frequency and therefore prices, which may erroneously appear to be predatory pricing when in fact it is the consequence of optimal network redesign. Finally, we demonstrate that even though low cost carriers lower prices, total social welfare with competing network structures can also be lowered. In other words, the poor financial performance of legacy carriers is not due to their inefficiency per se but due to an efficient Hub-and-Spoke network undermined by competition from inefficient Point-to-Point networks. We argue that social welfare may have been, and still can be, higher if entry and exit in air passenger travel industry is regulated.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.economics.utoronto.ca/public/workingPapers/tecipa-325.pdf
File Function: Main Text
Download Restriction: no

Bibliographic Info

Paper provided by University of Toronto, Department of Economics in its series Working Papers with number tecipa-325.

as in new window
Length: 39 pages
Date of creation: 08 Aug 2008
Date of revision:
Handle: RePEc:tor:tecipa:tecipa-325

Contact details of provider:
Postal: 150 St. George Street, Toronto, Ontario
Phone: (416) 978-5283

Related research

Keywords: Networks; Airlines; Regulation;

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Evans, William N & Kessides, Ioannis N, 1993. "Localized Market Power in the U.S. Airline Industry," The Review of Economics and Statistics, MIT Press, vol. 75(1), pages 66-75, February.
  2. Borenstein, S., 1991. "The Evolution of U.S. Airline Competition," Papers 389, California Davis - Institute of Governmental Affairs.
  3. Edlin, Aaron S. & Farrell, Joseph, 2002. "The American Airlines Case: A Chance to Clarify Predation Policy," Department of Economics, Working Paper Series qt0wx7c4zf, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  4. Christopher Mayer & Todd Sinai, 2002. "Network Effects, Congestion Externalities, and Air Traffic Delays: Or Why All Delays Are Not Evil," NBER Working Papers 8701, National Bureau of Economic Research, Inc.
  5. Youdi Schipper & Piet Rietveld & Peter Nijkamp, 1998. "Deregulation and Schedule Competition in Simple Airline Networks," ERSA conference papers ersa98p205, European Regional Science Association.
  6. Darin Lee & María José Luengo-Prado, 2005. "The Impact of Passenger Mix on Reported “Hub Premiums” in the U.S. Airline Industry," Southern Economic Journal, Southern Economic Association, vol. 72(2), pages 372–394, October.
  7. Morrison, Steven A & Winston, Clifford, 1990. "The Dynamics of Airline Pricing and Competition," American Economic Review, American Economic Association, vol. 80(2), pages 389-93, May.
  8. Bittlingmayer, George, 1990. "Efficiency and entry in a simple airline network," International Journal of Industrial Organization, Elsevier, vol. 8(2), pages 245-257, June.
  9. Barla, P., 1999. "Demand Uncertainty and Airline Network Morphology with Strategic Interactions," Papers 99-06, Laval - Recherche en Energie.
  10. Joseph I. Daniel & Munish Pahwa, 2005. "There and Back Again: Airline Routes, Fares and Passenger Flows in Network Equilibria," Working Papers 05-07, University of Delaware, Department of Economics.
  11. Tae Hoon Oum & Anming Zhang & Yimin Zhang, 1995. "Airline Network Rivalry," Canadian Journal of Economics, Canadian Economics Association, vol. 28(4a), pages 836-57, November.
Full references (including those not matched with items on IDEAS)

Citations

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:tor:tecipa:tecipa-325. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (RePEc Maintainer).

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.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with 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 profile, as there may be some citations waiting for confirmation.

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