Essays on Empirical Industrial Organization in the U.S. Airline Industry

Tak Keung Wong

Domestic airline alliances have caught attention of Federal aviation regulators for many years. In 1998, U.S. General Accounting Office (GAO) published a report on domestic code-sharing alliances. In the report, GAO expressed concerns about the potential anticompetitive practices existing in the proposed three alliances. Although the formation of alliances would have significant impacts on the U.S. airline industry, domestic airline alliances draw little attention from airline literature. This dissertation aims to find out more about this particular aviation business arrangement. This dissertation contains three manuscripts. The first manuscript examines demand elasticities for different air travel products by using a double-log demand equation. I utilize an instrumental variables (IV) approach to address the endogeneity problem. I also discuss a modified methodology in finding instruments for the endogenous prices in the airline industry. The results suggest that the price elasticities of the pure online, virtual code-sharing, and non-alliance interline products are elastic. The group of the pure online and virtual code-sharing products has higher product substitutability. This finding implies that more substitutes are present within the group of pure online and virtual code-sharing products. The second manuscript estimates the oligopoly power and market structure of United-US Airways virtual code-share markets. I develop a structural equilibrium model and employ three-stage least-squares (3SLS) estimation approach to obtain the results. The results suggest that the market structure for those code-share markets lies somewhere between a non-cooperative oligopoly and cartel structures. In addition, I find evidence that substantial oligopoly power exists in those markets. The results also shed light that those markets experience a decreasing trend in the demand in those markets. This implies that the negative impact of the global financial crisis in the fall of 2008 is on the demand of air travel products. The third manuscript studies the entry patterns of virtual code-sharing alliances. Specially, I examine the entry patterns of United-US Airways virtual code-sharing alliance. I use a probit model to estimate the reduced-form equation for the entry decisions of virtual code-sharing alliances. The empirical results suggest that Southwest Airlines is not the direct competitor to virtual code-sharing alliances.

Essays on Empirical Industrial Organization in the U.S. Airline Industry

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