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Domestic Market Power in the International Airline Industry

Author

Listed:
  • G. de Jong

    () (VU Amsterdam, The Netherlands)

  • C.L. Behrens

    () (VU Amsterdam, The Netherlands)

  • H. van Herk

    () (VU Amsterdam, The Netherlands)

  • E.T. Verhoef

    () (VU Amsterdam, The Netherlands)

Abstract

We posit and empirically test the hypothesis that airlines are able to charge a fare premium in markets that originate in their domestic country relative to similar markets that originate in foreign countries. To this end, we focus on intercontinental one-stop air travel trips for which the main, intercontinental, flight legs are identical, while the feeder legs depart from a mixture of domestic- and foreign origins. We collect a unique database of published fares for such trips and estimate reduced form fare regressions with main flight leg fixed effects. We find that trips from and to domestic airports (compared with foreign airports) are characterized by about 9.5 per cent higher fares, even after adding controls for airport dominance, trip operating costs, the competitive environment and origin catchment area characteristics. These findings demonstrate that airlines have substantial domestic market power, enabling them to raise fares at their domestic airports irrespective of aforementioned market conditions. The magnitude of this domestic country effect is large relative to the traditional airport dominance effect, suggesting that the distinction between domestic- and foreign origins is a crucial determinant of the degree of market power that airlines can exert in the international airline industry.

Suggested Citation

  • G. de Jong & C.L. Behrens & H. van Herk & E.T. Verhoef, 2017. "Domestic Market Power in the International Airline Industry," Tinbergen Institute Discussion Papers 17-009/VIII, Tinbergen Institute, revised 20 Mar 2018.
  • Handle: RePEc:tin:wpaper:20170009
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    References listed on IDEAS

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    More about this item

    Keywords

    market power; airline competition; price discrimination; international aviation;

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L93 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Air Transportation
    • R40 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Transportation Economics - - - General

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