The economics of international codesharing: an analysis of airline alliances

International airline alliances allow airlines to coordinate their operations in providing international service. This paper analyzes the effect of such alliances on traffic levels, fares, and welfare. In the model, the benefits of alliances arise because cooperative pricing of trips by the partners puts downward pressure on fares in the interline city-pair markets (these are markets where travel on both carriers is necessary). The loss of competition in the interhub market, which connects the hub cites of the partners, generates a countervailing effect, tending to raise the fare in that market. While the presence of economies of traffic density complicates these impacts by generating cost links across markets, simulation analysis shows that the above tendencies typically prevail. Welfare analysis shows that both consumer and total surplus typically rise following formation of an alliance despite the harm to interhub passengers, suggesting that the positive effects of alliances may outweigh any negative impacts.     

On the Absence of Directional Price Discrimination in the U.S. Airline Industry*

Certain forms of price discrimination in oligopoly markets can lead to more aggressive competition and lower profits, yet few empirical studies examine how extensively such strategies are used. I consider one such strategy, testing whether airlines charge different prices on the same flights to passengers that originate from different endpoints. Using fare quote data I formulate a new approach to measure discrimination while controlling for cost heterogeneity and find that carriers within the U.S. domestic market do not engage in directional price discrimination despite frequently using other similar pricing strategies that are unlikely to enhance competition.     

Discounts and Public Service Obligations in the Airline Market: Lessons from Spain

We examine the impact of the universal service policy that was applied to the Spanish airline market during the period 2001?C2009. Our analysis shows that routes that benefit from price discounts that were granted by the government to island residents enjoy higher demand than the rest of the country??s domestic routes. However, the lower elasticity of demand of these routes allows airlines to set higher prices. We also find that airlines that operate inter-island routes on which their services are regulated by price caps and frequency floors charge lower prices and schedule higher flight frequencies than is the case on unregulated routes. Overall, our analysis suggests that price discounts for island residents help guarantee the profitability of routes that are regulated by public service obligations.     

Low-cost airlines and online price dispersion

This paper presents a new form of online pricing tactic where airlines post, at the same time and for the same flight, fares in different currencies that violate the Law of One Price. Unexpectedly for an online market, price dispersion may be accompanied by a hidden discount that tends to persist in the period preceding a flight's departure. The econometric analysis reveals that airlines post dispersive fares in less competitive routes with more heterogeneous demand. Furthermore, temporal persistence of intra-firm fare dispersion suggests that it is an equilibrium phenomenon engendered by the airlines' need to manage stochastic demand conditions for a specific flight.     

Are legacy airline mergers pro- or anti-competitive? Evidence from recent U.S. airline mergers

Due to a series of recent mergers, the number of legacy airlines in the United States has decreased from six to three. We conduct a comprehensive investigation of the effect on fares and output of these legacy airline mergers to determine whether the mergers have had an overall pro-competitive or anti-competitive effect on consumers. Our difference-in-differences regression analysis shows that these mergers have been pro-competitive, with no significant adverse effect on nominal fares and with significant increases in passenger traffic as well as capacity. Taken together, the results indicate that the recent legacy mergers were pro-competitive.     

Price wars and price collusion in China's airline markets

In the absence of an effective antitrust law, both fare wars and price collusion have been pervasive in China's airline markets, causing concern for both airlines and consumers. A study of monthly airfare data from 2002 to 2004 confirms that fare wars occur periodically, as well as price collusion. Both tend to be short-lived. The fact that collusion is more likely to occur in January and April when demand is high, as revealed by China Eastern's and China Southern's price-war and collusion models, has been confirmed by interview information obtained from the airlines' sales managers. However, there is also evidence in these models suggesting that collusion can be more easily formed when demand is low. High airport concentration measured by the HHI may facilitate collusion in certain circumstances, but it may also lead to more price wars under other conditions. Concentration in both airports and routes does not appear to systematically affect the occurrence of fare wars and collusion in all the models estimated. We also reject the possibility that mutual forbearance due to multimarket contact plays any important anti-competitive role in China's airline markets.     

HOW DOES THE INTERNET INFLUENCE PRICE DISPERSION? EVIDENCE FROM THE AIRLINE INDUSTRY*

I estimate the Internet's effect on the level and dispersion of airline fares on a given route within and across firms. The results suggest that increases in Internet penetration reduce average price and lead to higher intrafirm price dispersion, while increases in Internet penetration do not affect interfirm price dispersion on a given route. Internet penetration affects average fares most in competitive markets. These results suggest that the Internet has significantly but subtlely influenced domestic airline competition. The effect of the Internet on prices and price dispersion is larger on direct flights.     

Price discrimination through refund contracts in airlines

This paper shows how an airline monopoly uses refundable and non-refundable tickets to screen consumers who are uncertain about their travel. Our theoretical model predicts that the difference between these two fares diminishes as individual demand uncertainty is resolved. Using an original data set from U.S. airline markets, we find strong evidence supporting our model. Price discrimination opportunities through refund contracts decline as the departure date nears and individuals learn about their demand.     

An Empirical Analysis of Global Airline Alliances: Cases in North Atlantic Markets

This paper empirically investigatesthe effects on air fares, passenger volume, andconsumer surplus of four major alliances in NorthAtlantic aviation markets. The four alliances areBritish Airways/USAir, Delta/Sabena/Swissair,KLM/Northwest, and Lufthansa/United Airlines. We findthat equilibrium passenger volume increased by some36,000 passengers annually and equilibrium air faresdecreased by an average of $41 on the routes servedby the allying carriers, and that consumers weregenerally better off due to the alliances.     

The Determinants of Pricing in the Mexican Domestic Airline Sector: The Impact of Competition and Airport Congestion

Low-cost airlines in Mexico affect the lowest-quoted fares of one of the two principal incumbent carriers, but have no effect on the lowest-quoted fares of the other incumbent carrier. The same conclusion holds for competition between incumbent carriers where the lowest-quoted fares of one of the incumbent carriers is lower when incumbents compete. Congestion at the Mexico City airport is limiting potential competition, with carriers being able to charge a significant price premium. This suggests that the societal costs of airport congestion can go well beyond the negative congestion externality and should also include the effects of reduced competition. These findings raise important public policy issues.     

Airline Market Power and Intertemporal Price Dispersion

This paper analyzes the empirical relationship between market structure and price dispersion in the airline markets connecting the U.K. and the Republic of Ireland. Price dispersion is measured by the Gini coefficient, calculated using fares posted on the Internet at specific days before takeoff. We control for passengers' heterogeneity in their purpose of travel, as well as for such peak periods as Christmas and Easter. Our finding of a negative correlation between competition and price dispersion suggests that competition is likely to hinder the airlines' ability to price discriminate, although this effect appears to be lessened in peak periods.     

Publication of Information and Market Response: The Case of Airline on Time Performance Reports

This paper investigates market response to publication of on time performance information. Theory suggests that reduction in search costs generates more honest airlines and better quality service, a distribution of price-quality bundles, increased demand, exit by inefficient airlines and reduction of price rigidity. An ARIMA study of U.S. domestic airline operations finds that after publication of performance information the market generated better performance, increased quality distribution, enhanced demand, exit by four of fourteen airlines and reduced price-quality rigidity. Publication of information may improve performance in markets characterized by asymmetric information and high search costs.     

中国铁路客运高峰负荷定价模型分析

中国铁路客运供需矛盾非常突出，铁路客运具有的双高峰、高峰固定等特点，进一步加剧了供需矛盾；现行定价体系导致需求相对过旺，供给能力难以迅速增长；必须在考虑需求弹性和交叉弹性的基础上．针对中国铁路特性科学制定客运价格。本文利用相关数据对定价原则所涉及到的变量进行了实证测算，并提出了相应的政策建议。     

Markup pricing in petroleum refining:: A multiproduct framework

This paper describes a structural model of markup pricing under joint production with quasi-fixed inputs of capital, labor, and inventories. The price–cost markups are functions of the inverse price elasticity of demand, an industry average conjectural variation elasticity, and the inventory to sales ratio. Our empirical findings suggest significant markups over marginal cost that differ considerably by product. This study also estimates the elasticities of markups with respect to supply and demand shocks.     

Network Structure and Airline Scheduling

This paper provides a simple analysis of the effects of network structure on the scheduling, traffic, and aircraft size choices of a monopoly airline. The analysis shows that switching to a hub-and-spoke network leads to increases in both flight frequency and aircraft size, while stimulating local traffic in and out of the hub. In addition, HS networks are shown to be preferred by the airline when travel demand is low, when flights are expensive to operate, and when passengers place a high value on flight frequency but are not excessively inconvenienced by the extra travel time required for a connecting trip. The welfare analysis shows that the flight frequency, traffic volumes, and aircraft size chosen by the monopolist are all inefficiently low under both network types. Moreover, in the most plausible case, the monopolist's network choice exhibits an inefficient bias toward the HS network, apparently reflecting an excessive desire to economize on the number of flights.     

Living Wage Policies at the San Francisco Airport: Impacts on Workers and Businesses

This paper evaluates the costs, benefits and related impacts of living wage policies implemented at the San Francisco Airport (SFO). Unlike other living wage ordinances, the policies at SFO cover a large proportion of the low-wage labor force in a distinct labor market. The authors find that about 73 percent of the ground-based non-managerial workers at SFO received substantial wage increases as a direct or indirect result of the policies; the proportion of these workers earning under $10 per hour fell from 55 percent to 5 percent, significantly reducing earnings inequality. Other benefits to workers included enhanced health benefits and an arrest of declines in quality of life indices. The costs of the policies to employers amounted to an average of 0.7 percent of fare revenue, or $1.42 per airline passenger. We observe a series of dynamic adjustments that reduced those costs, including dramatically reduced turnover, improved worker morale and greater work effort. We find some limited evidence of worker-worker substitution, but no evidence of employment decline.     

Pricing Schemes and Seller Fraud: Evidence from New York City Taxi Rides

Different pricing schemes gives sellers different financial incentives to defraud consumers. Using rich microdata on New York City taxi rides, we examine the differences in traveled distance, duration and fare between trips taken by non‐local passengers and those by comparable local passengers. We find that, for trips subject to a two‐part tariff, the discrepancies are larger when the variable rate is higher, or when the expected post‐dropoff occupancy is lower; furthermore, the impact of the post‐dropoff occupancy is more pronounced when the variable rate is higher. In contrast, trips subject to a flat fare scheme do not exhibit these patterns.     

The Impact of Mergers on Quality Provision: Evidence from the Airline Industry

We examine how mergers affect quality provision by analyzing five U.S. airline mergers, focusing on on‐time performance (OTP). We find that airline mergers have minimal negative impacts on OTP, and likely result in long‐run improvements due to efficiencies. Importantly, we show that this finding is not driven by post‐merger changes in price that could affect OTP. Consequently, at least in the case of airlines, policymakers should not, as a rule, fear the negative quality effects of mergers.     

Airport deregulation: Effects on pricing and capacity

We use a model of vertical relations between two congestible airports and an airline oligopoly to examine, both analytically and numerically, how deregulation may affect airports prices and capacities. We find that: (i) unregulated profit-maximizing airports would overcharge for the congestion externality and, compared to the first-best, would induce large allocative inefficiencies and dead-weight losses. They would restrict capacity investments but, overall, would induce fewer delays; (ii) Welfare maximization subject to cost recovery performs quite well, achieving congestion levels similar to a private-unregulated airport but without inducing such large traffic contraction; this puts a question mark on the desirability of deregulation of private airports; (iii) Increased cooperation between airlines and airports provides some improvements, but the resulting airport pricing strategy leads to a downstream airline cartel; (iv) When schedule delay costs effects are strong and airline differentiation is weak, it may be optimal to have a single airline dominating the airports, but this happens only when airports' pricing schemes render the number of airlines irrelevant for competition.     

Raising rivals’ cost in multi-unit auctions

The objective many telecom regulators want to achieve when they decide to auction spectrum is that acquiring firms pay a market price (based on the opportunity cost principle). The simultaneous ascending auction may fail in this respect, as it provides bidders with an opportunity to engage in strategic demand reduction. This paper asks whether the combinatorial clock auction (CCA) fares better in this respect. We show that the answer to this question depends on the objectives bidders have. If bidders have only the slightest preference to raise rivals’ cost, they will use the opportunities the CCA provides them to engage in strategic demand expansion. This is even the case when the clock phase ends with excess demand.