Friday, June 19, 2009

Economic Analysis of Hub Dominance

University of Virginia Economics Professors Federico Ciliberto and Jonathan W. Williams's working paper, Limited Access to Airport Facilities and Market Power in the Airline Industry (SSRN Working Paper Series, Feb. 12, 2009), may be of interest to blog readers.  The abstract reads as follows:

We investigate the role of limited access to airport facilities as a determinant of the hub premium in the US airline industry. We use original data from competition plans that airports are required to submit to the Department of Transportation in compliance with the Aviation Investment and Reform Act for the 21st Century. We collect information on the availability and control of airport gates, on leasing and sub-leasing arrangements, and on restrictions that airport face to expand their facilities.

We find that the hub premium is increasing in the ticket fare. We show that control of gates leased on an exclusive basis is a crucial determinant of the hub premium. Limits on the fees that airlines can charge for subleasing their gates lower the prices charged by airlines. Finally, control of gates and restrictions on sublease fees explain high fares only when there is a scarcity of gates relative to the number of departures out of an airport.

The paper may be downloaded from SSRN here.

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