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

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  • John D. Bitzan
  • Junwook Chi

Abstract

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

Suggested Citation

  • John D. Bitzan & Junwook Chi, 2006. "Higher Airfares to Small and Medium Sized Communities - Costly Service or Market Power?," Journal of Transport Economics and Policy, University of Bath, vol. 40(3), pages 473-501, September.
  • Handle: RePEc:tpe:jtecpo:v:40:y:2006:i:3:p:473-501
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    Cited by:

    1. Fageda, Xavier & Jiménez, Juan Luis & Valido, Jorge, 2016. "Does an increase in subsidies lead to changes in air fares? Empirical evidence from Spain," Transportation Research Part A: Policy and Practice, Elsevier, vol. 94(C), pages 235-242.
    2. Zuidberg, Joost, 2014. "Identifying airline cost economies: An econometric analysis of the factors affecting aircraft operating costs," Journal of Air Transport Management, Elsevier, vol. 40(C), pages 86-95.
    3. Chi, Junwook & Koo, Won W. & Lim, Siew H., 2009. "Price Dispersion in the U.S. Airline Industry," Journal of the Transportation Research Forum, Transportation Research Forum, vol. 48(3).
    4. Calzada, Joan & Fageda, Xavier, 2014. "Competition and public service obligations in European aviation markets," Transportation Research Part A: Policy and Practice, Elsevier, vol. 70(C), pages 104-116.
    5. Fageda, Xavier & Flores-Fillol, Ricardo, 2012. "Air services on thin routes: Regional versus low-cost airlines," Regional Science and Urban Economics, Elsevier, vol. 42(4), pages 702-714.
    6. Joan Calzada & Xavier Fageda, 2012. "Discounts and Public Service Obligations in the Airline Market: Lessons from Spain," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 40(4), pages 291-312, June.

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