A dynamic oligopoly game of the US airline industry: Estimation and policy experiments

Abstract

This paper studies the contribution of demand, costs, and strategic factors to the adoption of hub-and-spoke networks in the US airline industry. Our results are based on the estimation of a dynamic oligopoly game of network competition that incorporates three groups of factors that may explain hub-and-spoke networks: (1) travelers may value the services associated with the scale of operation of an airline in the hub airport; (2) operating costs and entry costs in a route may decline with the airline's scale of operation in the origin and destination airports (e.g., economies of scale and scope); and (3) a hub-and-spoke network may be an effective strategy to deter the entry of other carriers. We estimate the model using data from the Airline Origin and Destination Survey with information on quantities, prices, and entry and exit decisions for every airline company in the routes between the 55 largest US cities. As methodological contributions, we propose and apply a method to reduce the dimension of the state space in dynamic games, and a procedure to deal with the problem of multiple equilibria when using a estimated model to make counterfactual experiments. We find that the most important factor to explain the adoption of hub-and-spoke networks is that the cost of entry in a route declines importantly with the scale of operation of the airline in the airports of the route. For some of the larger carriers, strategic entry deterrence is the second most important factor to explain hub-and-spoke networks.

Airline strategic alliances in overlapping markets: Should policymakers be concerned?

“…2 , 3 and 4 are not statistically di¤erent from zero, suggesting that: (1) there is no change in demand over the pre and postalliance periods for non-Delta/Continental/Northwest products; and (2) in the case of markets where Delta, Continental and Northwest compete but did not virtual codeshare together, demand did not change for products o¤ered by the three carriers over the pre and post-alliance periods.…”

“…DB1B is a database that is maintained and published by the U.S. Bureau of Transportation Statistics. Among other things, the database includes: (1) number of passengers that choose a given ‡ight itinerary; (2) the fares of these itineraries; (3) the speci…c sequence of airport stops that each itinerary uses in getting passengers from the origin to destination city; (4) the carrier(s) that marketed and sold the travel ticket (ticketing carriers), and the carrier(s) that passengers actually ‡y on for their trip (operating carriers); and (5) the distance ‡own on each itinerary in a directional market. The distance associated with each itinerary in a market may di¤er since each itinerary may use di¤erent connecting airports in transporting passengers from the origin to destination city.…”

“…In other words, the three carriers' networks overlap in all of the markets that remain in our …nal sample. In addition, similar to Berry (1992) and Aguirregabiria and Ho (2012) among others, we focus on airports in the largest 50 U.S. cities as measured by city population estimates from the U.S. Census Bureau. Table 1 reports a list of the cities and airports included in our sample.…”

Prevention of Competition by Competition Law: Evidence from Unbundling Regulation on Fiber-Optic Networks in Japan

“…However, in recent developments of globalization, technological progress, and the de facto standard economy, we can observe oligopolistic structures in some markets. 1 The authorities are deregulating or reinterpreting competition law and regulations to keep up with the current society's needs.…”

“…This is because they cannot get monopolistic pro…ts if they have to lend the …ber lines at a regulated low cost. Compared to the traditional metal line, this …ber-optic line can transfer large amounts of data with faster transfer rates, enabling services such as high speed internet, high qual- 1 For example: airlines, OS software, digital music downloads, credit cards, search engines, etc. ity digital voice, HDTV programs and cloud computing.…”