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Tracing the Woes: An Empirical Analysis of the Airline Industry

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Listed:
  • Steven Berry
  • Panle Jia

Abstract

The US airline industry went through tremendous turmoil in the early 2000s, with four major bankruptcies, two major mergers, and various changes in network structure. This paper presents a structural model of the industry, and estimates the impact of demand and supply changes on profitability. Compared with 1999, we find that, in 2006, air-travel demand was 8 percent more price sensitive, passengers displayed a stronger preference for nonstop flights, and changes in marginal cost significantly favored nonstop flights. Together with the expansion of low-cost carriers, they explain more than 80 percent of legacy carriers' variable profit reduction. (JEL L13, L25, L93)

Suggested Citation

  • Steven Berry & Panle Jia, 2010. "Tracing the Woes: An Empirical Analysis of the Airline Industry," American Economic Journal: Microeconomics, American Economic Association, vol. 2(3), pages 1-43, August.
  • Handle: RePEc:aea:aejmic:v:2:y:2010:i:3:p:1-43 Note: DOI: 10.1257/mic.2.3.1
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    References listed on IDEAS

    as
    1. Severin Borenstein & Nancy L. Rose, 2007. "How Airline Markets Work...Or Do They? Regulatory Reform in the Airline Industry," NBER Working Papers 13452, National Bureau of Economic Research, Inc.
    2. Severin Borenstein, 2005. "U.S. Domestic Airline Pricing, 1995-2004," Macroeconomics 0501006, EconWPA.
    3. Christopher T. Conlon & Julie Holland Mortimer, 2013. "Demand Estimation under Incomplete Product Availability," American Economic Journal: Microeconomics, American Economic Association, pages 1-30.
    4. Federico Ciliberto & Elie Tamer, 2009. "Market Structure and Multiple Equilibria in Airline Markets," Econometrica, Econometric Society, vol. 77(6), pages 1791-1828, November.
    5. Austan Goolsbee & Chad Syverson, 2008. "How Do Incumbents Respond to the Threat of Entry? Evidence from the Major Airlines," The Quarterly Journal of Economics, Oxford University Press, vol. 123(4), pages 1611-1633.
    6. Harumi Ito & Darin Lee, 2003. "Incumbent Responses to Lower Cost Entry: Evidence from the U.S. Airline Industry," Working Papers 2003-22, Brown University, Department of Economics.
    7. Olivier Armantier & Oliver Richard, 2008. "Domestic airline alliances and consumer welfare," RAND Journal of Economics, RAND Corporation, vol. 39(3), pages 875-904.
    8. Jean-Pierre H. Dubé & Jeremy T. Fox & Che-Lin Su, 2009. "Improving the Numerical Performance of BLP Static and Dynamic Discrete Choice Random Coefficients Demand Estimation," NBER Working Papers 14991, National Bureau of Economic Research, Inc.
    9. Borenstein, Severin & Rose, Nancy L, 1994. "Competition and Price Dispersion in the U.S. Airline Industry," Journal of Political Economy, University of Chicago Press, vol. 102(4), pages 653-683, August.
    10. Forbes, Silke J., 2008. "The effect of air traffic delays on airline prices," International Journal of Industrial Organization, Elsevier, vol. 26(5), pages 1218-1232, September.
    11. Philip G. Gayle, 2004. "Does Price Matter? Price and Non-price Competition in the Airline Industry," Econometric Society 2004 North American Summer Meetings 163, Econometric Society.
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    More about this item

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • L93 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Air Transportation

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