Policy Implications of the Effects of Concentration and Multimarket Contact in China’s Airline Market

Unlike many other mergers in developed countries, which might have been assessed and their effects estimated by antitrust authorities before being granted antitrust immunity, the airline mergers that swept China’s airline industry in 2002 occurred with no antitrust challenge. These mergers provide the opportunity to study important market power issues in China’s airline markets. Given that increased concentration and multimarket contact are the main legacies of an airline merger, the effects of mergers on these variables can raise the potential for the exercise of market power. However, an examination of the period 2002–2004 during which the Chinese airline mergers occurred shows that the resulting increased concentration and enhanced multimarket contact did not have important consequences for airfares in Chinese city-pair markets. The presence of Hainan Airlines appears to have played an important role in suppressing the airfares charged by China Eastern and China Southern.     

Market share and price determination in the contemporary airline industry

This paper examines airline pricing and market structure determination for domestic airport-pair routes. The model includes variables to control for the effects of congestion, consumer brand preferences, barriers to entry into airports, and multiple airport availability within a city. The results indicate the noncontestability of airline markets, but certain factors can mitigate a carrier's endpoint dominance. Additionally, the need for policies addressing airport congestion is indicated by several aspects of model results.     

Do low-quality products affect high-quality entry? Multiproduct firms and nonstop entry in airline markets

This paper studies the effect of product ownership and quality on nonstop entry in the airline industry. Specifically, this paper empirically examines the decision of an airline to offer high-quality nonstop service between cities given that the airline may or may not be offering lower quality one-stop service. I find that airlines that offer one-stop service through a hub are less likely to enter that same market with nonstop service than those that do not. In addition, the quality of the one-stop service is an important determinant of entry. Airlines are more likely to enter a market with nonstop service if their own or their rival's one-stop service in the market is of lower quality. Estimates suggest that the entry of a rival nonstop carrier diminishes the probability a carrier enters the market with nonstop service. However, airlines offering one-stop service respond differently to nonstop rivals. In particular, relative to other carriers, those offering one-stop service are more likely to enter markets if there are nonstop rivals, suggesting that cannibalization effects are diminished in the presence of nonstop competition.     

City-Pairs Versus Airport-Pairs: A Market-Definition Methodology for the Airline Industry

This paper provides a methodology for deciding which airports warrant grouping in multi-airport metropolitan areas. The methodology is based on the comparability of incremental competition effects from nearby airports on average fares at a metropolitan area’s primary airport. Results from a quarterly panel data set for the period 2003–2009 provide strong evidence that city-pairs, rather than airport-pairs, are the appropriate market definition for analyses of passenger air transportation involving many (but not all) large metropolitan areas. Based on the proposed method, we offer a recommended list of airports that should be grouped when creating city-pairs for the analysis of competition in the US domestic airline industry.     

东方航空迷航

一家有着良好市场资源的航空公司为何在收购战中不能把握自己的方向?元月8日的上海,天空阴霾,淡淡的雾将申城笼罩起来。     

Passing through the supply chain: Implications for market power

In this paper, we study the connection between pass-through and market power in the Brazilian Liquefied Petroleum Gas (LPG) industry. We use a state tax shock and apply a difference-in-differences strategy to estimate pass-through – at different levels of the supply chain – and an instrumented difference-in-differences strategy to estimate demand, and then feed a theoretical model to make inferences about a conduct parameter – that measures market power. We find an incomplete pass-through at the distribution level and for the supply chain as a whole, and a more-than-complete one at the retail level. Furthermore, we estimate price-elasticity of demand to be greater than one. When we feed a theoretical model of pass-through under imperfect competition with these estimates, we obtain a high conduct parameter at the whole supply chain level and an even higher one at the retail level alone. These results show that considering only the whole supply chain pass-through may lead to hasty conclusions about market power. Besides contributing to the empirical literature that connects pass-through with market power, we contribute to on-going national discussions regarding competitiveness in the LPG industry.     

The Effects of Market Structure and Technology on Airline Fleet Composition after Deregulation

The present study examines the effects of market structure and technology on airline fleet composition in the deregulated airline industry. To capture the effects of market structure and technology on airline fleet acquisition and use, a profit function which allows airline fleet in its specification is applied to derive the fleet composition function of an airline. The results show a steady pattern in airlines' adoption of two-engine wide-bodied aircraft during the post-deregulation era, providing evidence that the airlines have responded consistently to changes in market structure and technology in acquiring two-engine wide-bodied aircraft after deregulation.     

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.     

Does competition increase quality? Evidence from the US airline industry

This paper studies the impact of competition on quality provision in the US airline industry exploiting a novel source of exogenous variation in competition. While mergers among market incumbents may stifle competition, a merger may increase the probability of entry if the merging airlines were not operating prior to merger in the market but each of them had presence at different route endpoints. We find non-merging incumbent airlines increase their flight frequency upon entry threat and accommodate entry of the newly merged airline by lowering flight frequency upon entry. While non-merging incumbents reduced arrival delays only upon entry of the newly merged airline, we find that incumbents decrease their cancelation rates and departure delays both upon merger announcement and entry of the newly merged airline. Our evidence suggests an increase in competition may increase consumer surplus, because non-merging incumbents increase quality and convenience, while keeping their prices unchanged.     

Predatory reputation in US airline markets

Despite its long history in antitrust policy, predation remains a poorly understood phenomenon. The main difficulty is in empirically identifying predatory intent. I propose a method for measuring the effect of reputation, whose significance would enable us to infer predatory intents. Maximum likelihood estimation using simulated annealing algorithm is conducted with a sample of US airline markets. The results provide some support for the presence of entrants learning and reputation effect. As an application, I discuss how the outcomes of my empirical model could help analyze such antitrust cases as the American Airlines Case.     

The Capital Market Response to Wage Negotiations in the Airlines

This paper examines the effect of the announcement of various types of airline wage concessions on stock market value. Our results show that capital markets respond positively to wage cuts but not significantly to wage freezes or two-tier settlements. However, a significant intraindustry spillover effect from two-tier agreements was found that suggests that concessions by one carrier decreases the value of the remaining carriers. The results also vary by craft, indicating that labor market and institutional characteristics influence market response.     

中国大飞机产业化的市场约束与进入条件

中国大飞机项目成功的关键在于实现产业化,而能否产业化又取决于市场基础。由于民用大飞机产业属于买方约束条件十分严格的市场,中国大飞机项目产业化的基本立足点应该是储备进入市场的条件。目前中国国内民用航空市场的结构状况不利于国产大飞机进入市场,应当对航空公司作进一步重组的市场制度安排。为了能使中国的大飞机在实现规模化生产之前就能获得“买家”的订单,有必要在航空运输市场重组现有的航空公司,减少航空公司的数量,鼓励更有实力的航空公司的涌现。     

Effect of Merger on Market Price and Product Quality: American and US Airways

Review of Industrial Organization - In this paper, I analyze the effect of the merger between American Airlines (AA) and US Airways (US) on market price and product quality. I use...     

The Price Effects of the Delta/Northwest Airline Merger

This paper examines the price effects of the merger between Delta Airlines and Northwest Airlines. Empirical analysis finds that, other things equal, the fares for airport-pairs where Delta and Northwest competed with each other prior to the merger did not increase by much following the merger. This result is consistent with the additional finding that the impact of changes in low-cost carrier competition is large while the effect of changes in competition from legacy carriers is slight. Since both Delta and Northwest Airlines are legacy carriers, the results for other legacies suggest that the merger should not have exerted a dramatic impact on fares.     

The Meaning of Size: Output? Scope? Capacity? The Case of Airline Hubs

The size of a production facility has different specific meanings depending on the nature of the business decision at issue. We present a general theoretical model illustrating the profit-maximizing firm's interrelated choice of plant size in long-run, medium-run and short-run contexts. The model is then estimated for U.S. airline hubs. The results suggest that competition operates primarily via the capacity (long-run) size decision. A game-theoretic simulation based upon the results is consistent with the argument that the smaller of two hubs sharing an airport is at a significant competitive disadvantage.     

Can a margin squeeze indicate the need for deregulation? The case of fixed network voice telephony markets

In the beginning of fixed network liberalisation in Europe in the late 1990s, the main concern of regulators was to lower retail call prices. This was done by introducing wholesale regulation and promoting service-based competition. Some years later, the concern of some regulators turned from too high retail call prices to too low call prices, which might ‘squeeze’ entrants out of the market. This paper looks at a simple model in which this development is explained by increasing competitive pressure from an ‘outside opportunity’, most notably mobile telephony and cable. It is concluded that a margin squeeze is not necessarily used by the incumbent as a device to drive competitors out of the market and to increase market power but can also result from increased inter-modal competition. If this is the case, it is argued that the appropriate response would be deregulation or – under particular circumstances – a switch from cost-oriented access prices to alternatives such as retail-minus or capacity-based interconnection.     

Product specification under a threat of entry: Evidence from Airlines’ departure times

I examine how incumbent airlines adjust their departure times in response to the threat of entry by Southwest Airlines. I find that incumbents space their flights more evenly throughout the day when faced with potential entry. This reaction depends strongly on the level of the incumbent’s market share and hub status at the endpoint airports of a market. The evidence suggests that incumbents’ actions are designed to deter, rather than accommodate, entry. I do not find effects on flight frequency, suggesting that incumbents may rely more on the strategic choice of product attributes than on product proliferation to deter entry.     

Measuring Conduct and Cost Parameters in the Spanish Airline Market

This paper examines airline competition through an empirical specification of a demand and pricing equation system. The system is estimated for the Spanish airline market using a simultaneous procedure. The suitability of the Cournot assumption is tested in a competitive scenario characterized by an asymmetric oligopoly with capacity constraints. In addition, the degree of density economies is analyzed. Results show that Spanish airlines behave in a less competitive way than is implied by the Cournot solution. Finally, some evidence on the fact that thin routes can be considered as natural monopolies is found.     

航空联盟对国际枢纽机场间机票价格的影响——以我国主要非经停国际航线为例的实证研究

本文通过构建多元回归模型,实证分析了航空联盟对我国主要非经停国际航线客运价格的影响。结果发现,在控制其他一些影响因素之后,航空联盟的存在并不一定会引起航线票价的上升。本文最后依据实证结果,给出相关对策建议。     

Market structure and quality determination for complementary products: Alliances and service quality in the airline industry

This paper explores the effect of market structure on quality determination for complementary products. The focus is on the airline industry and the effect of airline alliances on flight frequency, an important element of service quality. With zero layover cost, the choice of flight frequencies has the same double-marginalization structure as in the usual alliance model, leading to a higher frequency in the alliance case as double marginalization is eliminated, along with a lower full trip price and higher traffic. The surprising result of the paper emerges with high-cost layover time, where double marginalization in frequencies is absent and where an alliance reduces service quality via a lower frequency, with the full price potentially rising (in which case traffic falls).