Deregulation and welfare in airline markets: An analysis of frequency equilibria

Abstract

This paper models airline competition as a two-stage game in frequency and prices, allowing for asymmetric frequency equilibria. The approach follows the spatial multiproduct oligopoly literature. The dynamic structure gives airlines an incentive to choose asymmetric frequency equilibria such that price competition is reduced. This feature is most pronounced in the case of inelastic demand, for which a maximum differentiation result is derived. We apply the model in a simulation study of airline deregulation of the Amsterdam—Maastricht market in The Netherlands, calculating welfare effects for various types of post-deregulation entry.