Airports, Pricing and Capacity

Paper Session

Friday, Jan. 6, 2017 10:15 AM – 12:15 PM

Hyatt Regency Chicago, Comiskey
Hosted By: Transportation and Public Utilities Group & American Economic Association
  • Chair: Patrick McCarthy, Georgia Institute of Technology

Airport Prices in a Two-Sided Market Setting

Marc Ivaldi
,
Toulouse School of Economics
Senay Sokullu
,
University of Bristol
Tuba Toru Delibasi
,
Bahcesehir University

Abstract

To analyze the rationale of airports’ business models, we first provide evidence that they should be considered two-sided markets. Second, we apply tests supporting the hypothesis that the major U.S. airports set profit-maximizing prices for the non-aeronautical services to passengers and Ramsey prices for the aeronautical services to airlines. We then conduct a welfare analysis to evaluate the impact of implementing profit-maximizing prices when an airport fully accounts for the two-sidedness of its activities. As changes in social welfare are airport-specific, the results indicate that privatization does not fit all airports.

Does Airport Size Matter? Hub Airports and Local Economic Outcomes

Marquise McGraw
,
Consumer Financial Protection Bureau

Abstract

This paper considers the marginal effect of an airport hub on a metropolitan area's economy over the period 1978-2012. Evidence from panel regression evidence indicates that airline hub airports increase personal income by at least 2.3 percent, and also increase establishment counts by at least 1.6 percent, within their respective commuting zone (CZ). Sectors most likely to experience employment growth are air travel and hotels and lodging; amusement and recreation are more likely to experience employment declines. Evidence from an event study analysis corroborates these findings. It additionally suggests hub loss causes significant decreases in service sector employment, service establishments, aggregate wages/payroll and wages per worker in the wake of hub closures. These effects appear to operate, especially for hubs dominated by major airlines, through changes in access to markets served by non-stop flights. These findings suggest that the effects of hub airports, in most cases, operate through their ability to facilitate efficient business travel.

Airline Capacity Strategies in an Era of Tight Oligopoly

John Brown
,
Georgia Southern University
Rand Ressler
,
Georgia Southern University

Abstract

ABSTRACT
Airline Capacity Strategies in an Era of Tight Oligopoly

One of the surprises of deregulation in American network industries has been the substantial concentration of activity in a limited number of firms. In the American airline industry the number of firms has shrunk from the approximately dozen incumbents prior to deregulation to three major network airlines and Southwest, which has not adopted the hub-and-spoke networks characterizing the other surviving majors. Recently there have been rising suspicions that the remaining majors have been colluding to restrict output and raise prices.
However, this is not the only possibility. Specifically, we investigate whether a Cournot game in capacity may be playing out in these markets. To implement our model, we employ a sample of the top 100 origin and destination markets for a single week in July 2014. This sample was chosen because these high density routes are most likely to display competitive behavior and July is among the peak months for air travel. The model is implemented empirically using simultaneous equations techniques.
The theoretical model is implemented using the three stage least squares technique in a six equation matrix representing the four major airlines (American, Delta, United, and USAir), Southwest, and the combined observations of the remaining 9 airlines servicing these routes. The results suggest that both collusive conduct and Cournot behaviors may be present in this market.

Service Competition in the Airline Industry: Schedule Robustness and Market Structure

Xiyan Wang
,
University of California-Irvine

Abstract

This paper addresses the question how airlines adjust their schedule robustness when market structure changes. To answer this question, the paper first recreated each flight’s ground buffer time using historical flight schedules and use it as a measure for schedule robustness. Examining the relationship between ground buffers and market structure shows that there exists service quality competition in the airline market, and carriers adopt more robust flight schedules to keep passengers from switching to other airlines, as more robust schedules generate less flight delays. However, such an effect is reduced at the hub airport, as competitors tradeoff robust schedules for shorter layover times when competition heats up.
Discussant(s)
James Peoples
,
University of Wisconsin-Milwaukee
John Bitzan
,
North Dakota State University
Mike Brown
,
Greater Toronto Airport Authority
Ken Button
,
George Mason University
JEL Classifications
  • L5 - Regulation and Industrial Policy
  • L9 - Industry Studies: Transportation and Utilities