Friday, March 25, 2011

Barriers to Entry in the Airline Industry

Blog readers may be interested in reviewing Jonathan W. Williams & Connan Andrew Snider's recent working paper, Barriers to Entry: An Analysis of the Wendell H. Ford Aviation Investment and Reform Act (Working Paper, Mar. 3, 2011) (available from SSRN here).  From the abstract:

In the airline industry, passengers pay higher fares at airports where a single carrier controls a high fraction of traffic. The economics of the industry suggests an inherent tradeoff between product quality and carrier size and concentration, making the welfare implications of these premia ambiguous. In this paper, we investigate the success of Congressional mandates aimed at increasing competition at highly concentrated major US airports. The mandates required airports above certain concentration thresholds to take concrete steps to ease and encourage new entry and expansion by smaller airlines, primarily by increasing access to airport facilities. We exploit a sharp discontinuity in the laws implementation to identify the effects of the law. In so doing we shed light on the nature of high fares at these concentrated airports. We find a statistically and economically significant decrease in fares resulting from an airport's coverage by the legislation. More specifically, we find that in markets where one (two) of the market's endpoints was (were) covered, fares dropped by 10% (18%). Moreover, most of this decrease has come from decreases in dominant carriersÂ’fares. We also find that approximately half of this decline in fares is driven by the entry of low-cost carriers into new markets. We find little evidence that the fare declines have been accompanied by decreases in quality measures, with the exception of congestion-related delays, suggesting the legislation has been welfare improving for consumers.

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