PRICE AND FREQUENCY CHOICE UNDER MONOPOLY AND COMPETION IN AVIATION MARKETS

Abstract

Using data on 172 city-pair markets in eight European countries, the effect of market structure on airlines choices of frequency and prices was investigated. Applying an address model, it is shown that equilibrium prices depend on passengers' value of time, marginal flight costs and the aggregate number of flights. Furthermore, it is shown that under monopoly the equilibrium price is higher and the aggregate frequency is lower than under competition. The estimates show that market structure does not have any effect on Economy class ticket prices. However, market structure does have an effect on Business class ticket prices. The effects are in the expected direction: increased market concentration and decreased number of airlines results in increased ticket prices. Further, it was found that applying the Herfindahl index as a measure of market concentration is restrictive and that the index instead should be decomposed. However, comparing the equilibrium price between monopoly and competitive routes the hypothesis of differences in equilibrium price was rejected. Regarding frequency choice, market structure again has a significant impact on the equilibrium prices, and the effects are as expected: decreased market concentration and an increased number of airlines results in increased aggregate frequencies. In the case of frequency, the hypothesis that the aggregate frequency is the same under monopoly as it is under competition was rejected; the aggregate frequency under monopoly was found to be much lower. (A) This document is available on the Internet: http://swopec.hhs.se/gunwpe/abs/gunwpe0071.htm

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