An economic analysis of risk management in the airline industry
The purpose of this article is to consider risk management in the airline industry using an economic model. An increase in the number of airlines can reduce the probability of passengers being unable to find substitutable flights, while it increases total entry costs. Thus, there is an optimal number of entries to the market, and we can evaluate whether the actual number of entries exceeds or falls short of the optimal level. On that basis, this article investigates the following two questions: (1)"Do excess or insufficient entries occur in the airline industry?" and (2)"If this is ambiguous, in what situations do excess or insufficient entries occur?" The conclusions of our analysis are as follows. First, it is ambiguous whether excess or insufficient entries occur. Second, the higher (lower) the cost of airfares, the probability of engine trouble, the number of flights and the number of passengers, the more likely is a situation of excess (insufficient) entries, while the higher (lower) the entry cost and flight cancellation cost, the more likely is a situation of insufficient (excess) entry.
Volume (Year): 29 (2009)
Issue (Month): 2 ()
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- Kotaro Suzumura & Kazuharu Kiyono, 1987. "Entry Barriers and Economic Welfare," Review of Economic Studies, Oxford University Press, vol. 54(1), pages 157-167.
- Steven C. Salop, 1979. "Monopolistic Competition with Outside Goods," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 141-156, Spring.
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- repec:ebl:ecbull:v:12:y:2005:i:4:p:1-11 is not listed on IDEAS
- Okuno-Fujiwara, Masahiro & Suzumura, Kotaro, 1993.
"Symmetric Cournot Oligopoly and Economic Welfare: A Synthesis,"
Springer;Society for the Advancement of Economic Theory (SAET), vol. 3(1), pages 43-59, January.
- Masahiro Okuno-Fujiwara & Kotaro Suzumura, 1991. "Symmetric Cournot Oligopoly and Economic Welfare: A Synthesis," Discussion Paper Series a242, Institute of Economic Research, Hitotsubashi University.
- N. Gregory Mankiw & Michael D. Whinston, 1986. "Free Entry and Social Inefficiency," RAND Journal of Economics, The RAND Corporation, vol. 17(1), pages 48-58, Spring.
- Arghya Ghosh & Souresh Saha, 2007. "Excess Entry in the Absence of Scale Economies," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 30(3), pages 575-586, March. Full references (including those not matched with items on IDEAS)
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