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Price and Frequency Choice under Monopoly and Competition in Aviation Markets

  • Carlsson, Fredrik


    (Department of Economics, School of Economics and Commercial Law, Göteborg University)

Using data on 172 city-pair markets in eight European countries, we investigate the effect of the market structure on airlines choices of frequency and prices. Applying an address model, we show that equilibrium prices depend on passengers value of time, marginal flight costs and the aggregate number of flights. Furthermore, we show that under monopoly the equilibrium price is higher and the aggregate frequency is lower than under competition. The estimations show that market structure does not have any effect on Economy class ticket prices. However, market structure does have an effect on Business class ticket prices. The effects are in the expected direction: increased market concentration and decreased number of airlines results in increased ticket prices. Further, we find that applying the Herfindahl index as a measure of market concentration is restrictive and that the index instead should be decomposed. However, comparing the equilibrium price between monopoly and competitive routes we can reject the hypothesis of differences in equilibrium price. Regarding frequency choice, market structure again has a significant impact on the equilibrium prices, and the effects are as expected: decreased market concentration and an increased number of airlines results in increased aggregate frequencies. In the case of frequency we can reject the hypothesis that the aggregate frequency is the same under monopoly as it is under competition; the aggregate frequency under monopoly is found to be much lower.

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Paper provided by University of Gothenburg, Department of Economics in its series Working Papers in Economics with number 71.

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Length: 18 pages
Date of creation: 07 Jun 2002
Date of revision:
Publication status: Published in Review of Industrial Organization, 2004, pages 37-49.
Handle: RePEc:hhs:gunwpe:0071
Contact details of provider: Postal: Department of Economics, School of Business, Economics and Law, University of Gothenburg, Box 640, SE 405 30 GÖTEBORG, Sweden
Phone: 031-773 10 00
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  1. Borenstein, S., 1991. "The Evolution of U.S. Airline Competition," Papers 389, California Davis - Institute of Governmental Affairs.
  2. Barla, Philippe, 1997. "Firm Size Inequality and Market Power," Cahiers de recherche 9714, Université Laval - Département d'économique.
  3. Norman, V.D. & Strandenes, S.P., 1990. "Deregulation Of Scandinavian Airlines - A Case Study Of The Oslo-Stockholm Route," Papers 04-90, Norwegian School of Economics and Business Administration-.
  4. Borenstein, Severin, 1990. "Airline Mergers, Airport Dominance, and Market Power," American Economic Review, American Economic Association, vol. 80(2), pages 400-404, May.
  5. Greenhut,Melvin L. & Norman,George & Hung,Chao-Shun, 1987. "The Economics of Imperfect Competition," Cambridge Books, Cambridge University Press, number 9780521305525.
  6. Brander, James A & Eaton, Jonathan, 1984. "Product Line Rivalry," American Economic Review, American Economic Association, vol. 74(3), pages 323-34, June.
  7. Lanfranchi, Joseph & Ohlsson, Henry & Skalli, Ali, 2001. "COMPENSATING WAGE DIFFERENTIALS AND SHIFT WORK PREFERENCES. Evidence from France," Working Papers in Economics 55, University of Gothenburg, Department of Economics.
  8. Panzar, John C, 1979. "Equilibrium and Welfare in Unregulated Airline Markets," American Economic Review, American Economic Association, vol. 69(2), pages 92-95, May.
  9. Steven C. Salop, 1979. "Monopolistic Competition with Outside Goods," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 141-156, Spring.
  10. Greenhut,Melvin L. & Norman,George & Hung,Chao-Shun, 1987. "The Economics of Imperfect Competition," Cambridge Books, Cambridge University Press, number 9780521315647.
  11. Youdi Schipper & Piet Rietveld & Peter Nijkamp, 2002. "European Airline Reform: An Empirical Welfare Analysis," Journal of Transport Economics and Policy, London School of Economics and University of Bath, vol. 36(2), pages 189-209, May.
  12. Martinez-Giralt, Xavier & Neven, Damien J, 1988. "Can Price Competition Dominate Market Segmentation?," Journal of Industrial Economics, Wiley Blackwell, vol. 36(4), pages 431-42, June.
  13. Marin, Pedro L, 1995. "Competition in European Aviation: Pricing Policy and Market Structure," Journal of Industrial Economics, Wiley Blackwell, vol. 43(2), pages 141-59, June.
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