Airline Hubs: Costs, Markups and the Implications of Customer Heterogeneity
This paper estimates a model of airline competition that captures the two major features of the industry: product differentiation and economies of density. The results not only provide support to some of the traditional common wisdom in the industry, but are also useful for understanding major puzzles concerning the evolution of the industry. The estimates indicate that a hubbing airline's ability to raise prices is focused on tickets that appeal to price-inelastic business travelers, who favor the origin-hub airline, even while paying an average premium of 20%. These high prices do not, however, provide a `monopoly umbrella' to other non-hub airlines. Finally, on the cost side there is evidence of economies of density (and therefore cost economies of hubbing) on longer routes. Consistent with the `Southwest Airlines' effect, there is no evidence of economies of density on shorter routes.
|Date of creation:||May 1996|
|Publication status:||published as Lee, Darin (ed.) Advances in Airline Economics. Volume 1. Competition Policy and Antitrust. Amsterdam and San Diego: Elsevier, 2006.|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
Web page: http://www.nber.org
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Berry, Steven T, 1990. "Airport Presence as Product Differentiation," American Economic Review, American Economic Association, vol. 80(2), pages 394-399, May.
- Bresnahan, Timothy F., 1989. "Empirical studies of industries with market power," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 2, chapter 17, pages 1011-1057 Elsevier.
- Brueckner, Jan K & Spiller, Pablo T, 1994. "Economies of Traffic Density in the Deregulated Airline Industry," Journal of Law and Economics, University of Chicago Press, vol. 37(2), pages 379-415, October.
- Brueckner, Jan K. & Spiller, Pablo T., 1991. "Competition and mergers in airline networks," International Journal of Industrial Organization, Elsevier, vol. 9(3), pages 323-342, September.
- Hausman, Jerry A & Wise, David A, 1978.
"A Conditional Probit Model for Qualitative Choice: Discrete Decisions Recognizing Interdependence and Heterogeneous Preferences,"
Econometric Society, vol. 46(2), pages 403-426, March.
- J. A. Hausman & D. A. Wise, 1976. "A Conditional Profit Model for Qualitative Choice: Discrete Decisions Recognizing Interdependence and Heterogeneous Preferences," Working papers 173, Massachusetts Institute of Technology (MIT), Department of Economics.
- Reiss, Peter C & Spiller, Pablo T, 1989. "Competition and Entry in Small Airline Markets," Journal of Law and Economics, University of Chicago Press, vol. 32(2), pages 179-202, October.
- Bailey, Elizabeth E & Williams, Jeffrey R, 1988. "Sources of Economic Rent in the Deregulated Airline Industry," Journal of Law and Economics, University of Chicago Press, vol. 31(1), pages 173-202, April.
- Severin Borenstein, 1991. "The Dominant-Firm Advantage in Multiproduct Industries: Evidence from the U. S. Airlines," The Quarterly Journal of Economics, Oxford University Press, vol. 106(4), pages 1237-1266.
- Berry, Steven T, 1992. "Estimation of a Model of Entry in the Airline Industry," Econometrica, Econometric Society, vol. 60(4), pages 889-917, July.
- Daniel McFadden, 1977. "Modelling the Choice of Residential Location," Cowles Foundation Discussion Papers 477, Cowles Foundation for Research in Economics, Yale University.
When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:5561. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.