Tracing the Woes: An Empirical Analysis of the Airline Industry

Berry, Steven; Jia, Panle

doi:10.1257/mic.2.3.1

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American Economic Journal: Microeconomics: Vol. 2 No. 3 (August 2010)

AEJ: Micro Volume. 2, Issue 3 | left

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Tracing the Woes: An Empirical Analysis of the Airline Industry

Article Citation

Berry, Steven, and Panle Jia. 2010. "Tracing the Woes: An Empirical Analysis of the Airline Industry." American Economic Journal: Microeconomics, 2(3): 1-43.

DOI: 10.1257/mic.2.3.1

Abstract

The US airline industry went through tremendous turmoil in the early 2000s, with four major bankruptcies, two major mergers, and various changes in network structure. This paper presents a structural model of the industry, and estimates the impact of demand and supply changes on profitability. Compared with 1999, we find that, in 2006, air-travel demand was 8 percent more price sensitive, passengers displayed a stronger preference for nonstop flights, and changes in marginal cost significantly favored nonstop flights. Together with the expansion of low-cost carriers, they explain more than 80 percent of legacy carriers' variable profit reduction. (JEL L13, L25, L93)

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Authors

Berry, Steven (Yale U)
Jia, Panle (MIT)

JEL Classifications

L13: Oligopoly and Other Imperfect Markets
L25: Firm Performance: Size, Diversification, and Scope
L93: Air Transportation

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