Thursday, October 28, 2021

Market Power in the U.S. Airline Industry

Market Power in the U.S. Airline Industry

Germán Bet

University of Florida


I document the evolution of market power in the U.S. airline industry for the period 1990:Q1-2019:Q4. I recover estimates of markups, defined as the ratio of price to marginal cost, at the airline-time level. Dominant carriers in the industry have substantially increased their markups in the last decade. The findings indicate an increase in market power: The increase in markups is not explained by proportionally higher fixed costs or a larger scale elasticity. In contrast, the net profit rate has dramatically increased for these carriers. I rely on these markup estimates and structural modeling to test if this recent increase in markups can be explained by a change in airlines’ conduct (coordinating behavior). The model rejects the null hypothesis of no increase in coordinating behavior for dominant carriers. Counterfactual simulations imply that the consumer surplus is, on average, 17% lower than it would have been under no change in conduct, and that prices are 10% higher.

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