Higher Airfares to Small and Medium Sized Communities - Costly Service or Market Power?

This study examines airfares for flights serving small and large communities, and attempts to explain their differences using a 10 per cent sample of all tickets sold nationwide in the year prior to the terrorist attacks of 11 September 2001. The study finds airfares that are 11 per cent higher for those serving communities of 300,000 or less in comparison to those serving communities of more than 300,000, on average. In examining reasons for fare differences, the study finds that average fares are higher for small communities due to a higher cost of serving such communities and due to market power differences. Moreover, these cost and market power differences in fares are roughly equal to each other. While it may be tempting to think of market power differences in fares as fixable through some competitive policy prescription, it is unlikely that any such policy would be successful. The market power differences accounting for fare differences between small and large communities are the result of the low density nature of small communities. Remedies aimed at increasing competition in small communities are likely to contribute to increasing costs, and service that is not viable for private airlines. © 2006 LSE and the University of Bath