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Demand Uncertainty and Capacity Utilization in Airlines

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  • Escobari, Diego
  • Lee, Jim

Abstract

This paper studies the relationship between demand uncertainty—the key source of excess capacity—and capacity utilization in the U.S. airline industry. We present a simple theoretical model that predicts that lower demand realizations are associated with higher demand volatility. This prediction is strongly supported by the results of estimating a panel GARCH framework that pools unique data on capacity utilization across different flights and over various departure dates. A one unit increase in the standard deviation of unexpected demand decreases capacity utilization by 21 percentage points. The estimation controls for unobserved time-invariant specific characteristics as well as for systematic demand fluctuations.

Suggested Citation

  • Escobari, Diego & Lee, Jim, 2013. "Demand Uncertainty and Capacity Utilization in Airlines," MPRA Paper 46059, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:46059
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    References listed on IDEAS

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    Citations

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    as


    Cited by:

    1. Benjamin Eden, 2013. "Price Dispersion And Demand Uncertainty: Evidence From Us Scanner Data," Vanderbilt University Department of Economics Working Papers 13-00015, Vanderbilt University Department of Economics.
    2. repec:spr:empeco:v:54:y:2018:i:2:d:10.1007_s00181-016-1212-3 is not listed on IDEAS
    3. Cristhian Mellado & Diego Escobari, 2015. "Virtual integration of financial markets: a dynamic correlation analysis of the creation of the Latin American Integrated Market," Applied Economics, Taylor & Francis Journals, vol. 47(19), pages 1956-1971, April.
    4. Benjamin Eden, 2014. "Demand uncertainty and efficiency," Vanderbilt University Department of Economics Working Papers 14-00011, Vanderbilt University Department of Economics.

    More about this item

    Keywords

    Demand uncertainty; capacity utilization; airlines; panel GARCH; GARCH-in-mean;

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • L93 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Air Transportation

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