INTER-FIRM RIVALRY AND FIRM-SPECIFIC PRICE ELASTICITIES IN DEREGULATED AIRLINE MARKETS.

Abstract

Since deregulation in 1978 the US airline industry has undergone major structural changes. A series of mergers and hub-and-spoke network development have increased market concentration at major airports as well as at industry level. The industry is still being consolidated. Analysts express concern regarding the increasing market power of a few airlines, especially in route markets connected to major hub airports. There is clear evidence that major US airlines attempt to solidify their market power by intensif ying hub and-spoke networks, offering commission overrides to travel agents (a system that rewards agents for directing a high proportion of their business to an airline), using skilful dynamic pricing and seat allocation techniques (scientific yield management) and frequent-flyer bonus programmes for rewarding brand-loyal customers. A large number of routes are served by three or fewer airlines, indicating that a small numbers oligopoly is the dominant market structure in the industry, particularly on the routes directly connected to major hubs. Furthermore, recent evidence shows that dominant airlines at hub airports have sustained higher average fares for the local traffic than their competitors (see Borenstein,1989, 1990; and Berry, 1992). This suggests the importance of understanding competitive interaction among airlines in order to explain their pricing behaviour and price differentials between airlines serving the same route markets.