Network Structure and Design in the Deregulated U.S. Airline Industry: an Argument for Re-Regulation?
This paper develops a model to explain and analyze the evolution of network structure (connectivity)and design (flight frequency, aircraft size, prices) in the post-deregulation U.S. airline industry. We show that legacy carriers choice of Hub-and-Spoke networks and the emergence of low cost carriers (LCCs) operating Point-to-Point networks were optimal choices. We demonstrate that LCCs need not necessarily charge lower prices, and their entry impacted legacy carriers’ prices in all markets, even those where there is no direct competition. We show that in response to entry, legacy carriers optimally lower flight frequency, leading to longer wait times between flights for which passengers are compensated by lower prices; conversely, if the entrant later exits, legacy carriers raise flight frequency and therefore prices, which may erroneously appear to be predatory pricing when in fact it is the consequence of optimal network redesign. Finally, we demonstrate that even though low cost carriers lower prices, total social welfare with competing network structures can also be lowered. In other words, the poor financial performance of legacy carriers is not due to their inefficiency per se but due to an efficient Hub-and-Spoke network undermined by competition from inefficient Point-to-Point networks. We argue that social welfare may have been, and still can be, higher if entry and exit in air passenger travel industry is regulated.
|Date of creation:||08 Aug 2008|
|Date of revision:|
|Contact details of provider:|| Postal: 150 St. George Street, Toronto, Ontario|
Phone: (416) 978-5283
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.:
- Bittlingmayer, George, 1990. "Efficiency and entry in a simple airline network," International Journal of Industrial Organization, Elsevier, vol. 8(2), pages 245-257, June.
- Evans, William N & Kessides, Ioannis N, 1993. "Localized Market Power in the U.S. Airline Industry," The Review of Economics and Statistics, MIT Press, vol. 75(1), pages 66-75, February.
- Edlin, Aaron S. & Farrell, Joseph, 2002.
"The American Airlines Case: A Chance to Clarify Predation Policy,"
Department of Economics, Working Paper Series
qt0wx7c4zf, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
- Aaron S. Edlin & Joseph Farrell, 2004. "The American Airlines Case: A Chance to Clarify Predation Policy," Law and Economics 0401003, EconWPA.
- Edlin, Aaron S. & Farrell, Joseph, 2002. "The American Airlines Case: A Chance to Clarify Predation Policy," Competition Policy Center, Working Paper Series qt32h8b40m, Competition Policy Center, Institute for Business and Economic Research, UC Berkeley.
- Darin Lee & María José Luengo-Prado, 2005. "The Impact of Passenger Mix on Reported “Hub Premiums” in the U.S. Airline Industry," Southern Economic Journal, Southern Economic Association, vol. 72(2), pages 372–394, October.
- Barla, Philippe, 1999.
"Demand Uncertainty and Airline Network Morphology with Strategic Interactions,"
Cahiers de recherche
9907, Université Laval - Département d'économique.
- Barla, P., 1999. "Demand Uncertainty and Airline Network Morphology with Strategic Interactions," Papers 99-06, Laval - Recherche en Energie.
- Tae Hoon Oum & Anming Zhang & Yimin Zhang, 1995. "Airline Network Rivalry," Canadian Journal of Economics, Canadian Economics Association, vol. 28(4a), pages 836-57, November.
- Christopher Mayer & Todd Sinai, .
"Network Effects, Congestion Externalities, and Air Traffic Delays: Or Why All Delays Are Not Evil,"
Zell/Lurie Center Working Papers
393, Wharton School Samuel Zell and Robert Lurie Real Estate Center, University of Pennsylvania.
- Christopher Mayer & Todd Sinai, 2002. "Network Effects, Congestion Externalities, and Air Traffic Delays: Or Why All Delays Are Not Evil," NBER Working Papers 8701, National Bureau of Economic Research, Inc.
- Shy,Oz, 2001.
"The Economics of Network Industries,"
Cambridge University Press, number 9780521800952.
- Severin Borenstein, 1992.
"The Evolution of U.S. Airline Competition,"
Journal of Economic Perspectives,
American Economic Association, vol. 6(2), pages 45-73, Spring.
- Youdi Schipper & Piet Rietveld & Peter Nijkamp, 1998. "Deregulation and Schedule Competition in Simple Airline Networks," ERSA conference papers ersa98p205, European Regional Science Association.
- Joseph I. Daniel & Munish Pahwa, 2005. "There and Back Again: Airline Routes, Fares and Passenger Flows in Network Equilibria," Working Papers 05-07, University of Delaware, Department of Economics.
- Morrison, Steven A & Winston, Clifford, 1990. "The Dynamics of Airline Pricing and Competition," American Economic Review, American Economic Association, vol. 80(2), pages 389-93, May.
When requesting a correction, please mention this item's handle: RePEc:tor:tecipa:tecipa-325. 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: (RePEc Maintainer)
If references are entirely missing, you can add them using this form.