Abstract
In this survey, we consider applied issues in the productivity and efficiency of the US and the international airline industry. We discuss the implications of mergers and alliances, vertical integration, collusive behavior, bankruptcy, pricing and differentiation by heterogeneous service and network characteristics, entry and competition, airport governance, inefficiency, and deregulatory dynamics. Due to legacies of regulations in the US, European, and international airline industry and the existence of subsidized national flag carriers, there are substantial differences in the level of productivity in the provision of airline services across different carriers and over time. Thus, we also examine various treatments in the applied airline economics literature that have modeled and measured the existence of time-varying inefficiency and its persistent, brought about in part by the long-run inefficiency of incumbent firms operating in non-contested markets. The formal rules and dynamics of regulation and deregulatory initiatives in the USA, Europe, and in international markets are also discussed, as well as the economic impacts of delays, the presence and exploitation of market power in projected niche market’s and the price premiums that go hand-in-hand with market power.
Prepared for Volume II of the Handbook of Production Economics, Robert Chambers, Subal Kumbhakar, and Subhash Ray (eds.), New York: Springer, in progress
Similar content being viewed by others
References
Abrate G, Erbetta F (2010) Efficiency and patterns of service mix in airport companies: an input distance function approach. Transp Res E 46(5):693–708
Aguirregabiria V, Ho CY (2010) A dynamic game of airline network competition: hub-and-spoke networks and entry deterrence. Int J Ind Organ 28(4):377–382
Aguirregabiria V, Ho CY (2012) A dynamic oligopoly game of the U.S. airline industry: estimation and policy experiments. J Econom 168(1):156–173
Alam IMS, Sickles RC (2000) Time series analysis of deregulatory dynamics and technical efficiency: the case of the U.S. airline industry. Int Econ Rev 41(1):203–218
Alam IMS, Ross LB, Sickles RC (2001) Time series analysis of strategic pricing behavior in the US airline industry. J Prod Anal 16:49–62
Amsler C, Prokhorov A, Schmidt P (2016) Endogeneity in stochastic frontier models. J Econom 190(2):280–288
Aravena O, Basso LJ, Figueroa N (2019) Effects of asymmetric information on airport congestion management mechanisms. Int J Ind Organ 62(C):4–27
Armantier O, Richard O (2008) Domestic airline alliances and consumer welfare. Rand J Econ 39(3):875–904
Aryal G, Murry C, Williams JW (2018) Price discrimination in international airline markets. SSRN Working Paper
Bajari P, Benkard CL, Levin J (2007) Estimating dynamic models of imperfect competition. Econometrica 75(5):1331–1370
Bamberger GE, Carlton DW, Neumann LR (2004) An empirical investigation of the competitive effects of domestic airline alliances. J Law Econ 47(1):195–222
Basu S, Fernald JG (1997) Returns to scale in U.S. production: estimates and implications. J Polit Econ 105(2):249–283
Battese GE, Coelli TJ (1992) Frontier production functions, technical efficiency and panel data with application to paddy farmers in India. J Prod Anal 3:153–169
Benkard CL, Bodoh-Creed A, Lazarev J (2019) Simulating the dynamic effects of horizontal mergers: US. Working Paper
Berry S, Jia P (2010) Tracing the woes: an empirical analysis of the airline industry. Am Econ J: Microecon 2(August):1–43
Borenstein S (1989) Hubs and high fares: dominance and market power in the U.S. airline industry. Rand J Econ 20:344–365
Borenstein S (2011) Why can’t U.S. airlines make money ? AEA Pap Proc 101(3):233–237
Borenstein S, Netz J (1999) Why do all the flights leave at 8 am?: Competition and departure-time differentiation in airline markets. Int J Ind Organ 17:611–640
Borenstein S, Rose NL (1994) Competition and price dispersion in the U.S. airline industry. J Polit Econ 102(4):653–683
Borenstein S, Rose NL (1995) Bankruptcy and pricing behavior in U.S. airline markets. AEA Pap Proc 85(2):397–402
Borenstein S, Rose NL (2003) The impact of bankruptcy on airline service levels. AEA Pap Proc 93:415–419
Bottasso A, Conti M, Piga C (2012) Low cost carriers and airports’ performance: empirical evidence from a panel of UK airports. Ind Corp Change 22:745–769
Bresnahan TF (1982) The oligopoly solution is identified. Econ Lett 10:87–92
Bresnahan TF (1989) Studies of industries with market power. In: Schmalensee R, Willig R (eds) The handbook of industrial organization, vol 2. Elsevier B.V, Amsterdam, pp 1011–1057
Brueckner JK, Proost S (2010) Carve-outs under airline antitrust immunity. Int J Ind Organ 28(6):657–668
Brueckner J, Dyer N, Spiller PT (1992) Fare determination in airline hub-and-spoke networks. Rand J Econ 23:309–333
Brueckner JK, Lee DN, Singer ES (2011) Alliances, codesharing, antitrust immunity, and international airfares: do previous patterns persist? J Comp Law Econ 7(3):573–602
Captain PF, Sickles RC (1997) Competition and market power in the European airline industry: 1976–90. Manag Decis Econ 18(3):209–225
Chakrabarty D, Kutlu L (2014) Competition and price dispersion in the airline markets. Appl Econ 46:3421–3436
Chandra A, Lederman M (2018) Revisiting the relationship between competition and price discrimination. Am Econ J Microecon 10(2):190–224
Ciliberto F, Schenone C (2012) Bankruptcy and product-market competition: evidence from the airline industry. Int J Ind Organ 30:564–577
Ciliberto F, Tamer E (2009) Market structure and multiple equilibria in airline markets. Econometrica 77(6):1791–1828
Ciliberto F, Williams JW (2010) Limited access to airport facilities and market power in the airline industry. J Law Econ 53(3):467–495
Ciliberto F, Williams JW (2014) Does multimarket contact facilitate tacit collusion? Inference on conduct parameters in the airline industry. Rand J Econ 45(4):764–791
Ciliberto F, Zhang Z (2017) Multiple equilibria and deterrence in airline markets. Econ Inq 55(1):319–338
Ciliberto F, Murry C, Tamer E (2018) Market structure and competition in airline markets. SSRN Working Paper
Ciliberto F, Watkins E, Williams JW (2019) Collusive pricing patterns in the U.S. airline industry. Int J Ind Organ 62:136–157
Cornwell C, Schmidt P, Sickles RC (1990) Production frontiers with time-series variation in efficiency levels. J Econ 46:185–200
Craig S, Airola J, Tipu M (2012) General purpose of special district governance? Technical efficiency vs. rent dissipation in airport finances. Public Finance Rev 40:712–735
Duygun M, Kutlu L, Sickles RC (2016) Measuring productivity and efficiency: a Kalman filter approach. J Prod Anal 46:155–167
Fang Y, Sickles RC (2007) A dynamic model of airline competition. Rev Netw Econ 6(3):355–371
Färe R, Grosskopf S, Sickles RC (2007) Productivity? of U.S. airlines after deregulation. J Transp Econ Pol 41(1):93–112
Forbes SJ (2008) The effect of air traffic delays on airline prices. Int J Ind Organ 26:1218–1232
Forbes SJ, Lederman M (2009) Adaptation and vertical integration in the airline industry. Am Econ Rev 99(5):1831–1849
Forbes SJ, Lederman M (2010) Does vertical integration affect firm performance? Evidence from the airline industry. Rand J Econ 41(4):765–790
Forbes SJ, Lederman M, Tombe T (2015) Quality disclosure programs and internal organizational practices: evidence from airline flight delays. Am Econ J Microecon 7(2):1–26
Forbes SJ, Lederman M, Yuan Z (2017) Do airlines pad their schedules? Working Paper
Forbes SJ, Lederman M, Wither MJ (2019) Quality disclosure when firms set their own quality targets. Int J Ind Organ 62:228–250
Gayle PG (2013) On the efficiency of codeshare contracts between airlines: is double marginalization eliminated? Am Econ J Microecon 5(4):244–273
Gerardi KS, Shapiro AH (2009) Does competition reduce price dispersion? New evidence from the airline industry. J Polit Econ 117(1):1–37
Goetz CF, Shapiro AH (2012) Strategic alliance as a response to the threat of entry: evidence from airline code sharing. Int J Ind Organ 30(6):735–747
Good DH, Nadiri MI, Röller LH, Sickles RC (1993) Efficiency and productivity growth comparisons of European and U.S. air carriers: a first look at the data. J Prod Anal 4(1–2):115–125
Good DH, Sickles RC, Weiher JC (2008) A hedonic price index for airline travel. Rev Income Wealth 54(3):438–465
Goolsbee A, Syverson C (2008) How do incumbents respond to the threat of entry on their networks? Evidence from the major airlines. Q J Econ 123(4):1611–1633
Greene WH (2005a) Fixed and random effects in stochastic frontier models. J Prod Anal 23:7–32
Greene WH (2005b) Reconsidering heterogeneity in panel data estimators of the stochastic frontier model. J Econ 126:269–303
Hicks JR (1935) Annual survey of economic theory: the theory of monopoly. Econometrica 3:1–20
Howell C, Grifell-Tatjé E (2019) Unbundled airfares: a comprehensive analysis. Working paper
Karakaplan MU, Kutlu L (2017a) Handling endogeneity in stochastic frontier analysis. Econ Bull 37:889–901
Karakaplan MU, Kutlu L (2017b) Endogeneity in panel stochastic frontier models: an application to the Japanese cotton spinning industry. Appl Econ 49:5935–5939
Kutlu L (2010) Battese-Coelli estimator with endogenous regressors. Econ Lett 109:79–81
Kutlu L, McCarthy P (2016) U.S. airport governance and efficiency. Transp Res E Logist Transp Rev 89:117–132
Kutlu L, Sickles RC (2012) Estimation of market power in the presence of firm level inefficiencies. J Econ 168:141–155
Kutlu L, Sickles RC (2017) Measuring market power when firms price discriminate. Empir Econ 53(1):287–305
Kutlu L, Wang R (2018a) Estimation of cost efficiency without cost data. J Prod Anal 49:137–151
Kutlu L, Wang R (2018b) Price dispersion, competition, and efficiency - evidence from Chicago based routes. J Transp Econ Pol 52(1):23–44
Kutlu L, Tran KC, Tsionas MG (2019) A time-varying true individual effects model with endogenous regressors. J Econ 211(2):539–559
Lau LJ (1982) On identifying the degree of competitiveness from industry price and output data. Econ Lett 10:93–99
Lazarev J (2013) The welfare effects of intertemporal price discrimination: an empirical analysis of airline pricing in U.S. monopoly markets. Working Paper
Lederman M (2007) Do enhancements to loyalty programs affect demand? The impact of international frequent flyer partnerships on domestic airline demand. Rand J Econ 38(4):1134–1158
Li S, Roberts J, Mazur J, Park Y, Zhang J (2018) Endogenous and selective service choices after airline mergers. NBER Working Paper 24214
Martin JC, Voltes-Dorta A (2011) The econometric estimation of airports’ cost function. Transp Res B 45:112–127
Martin JC, Roman C, Voltes-Dorta A (2011) Scale economies and marginal costs in Spanish airports. Transp Res E 47:238–248
Morrison SA, Winston C (2007) Another look at airport congestion pricing. AEA Pap Proc 97(5):1970–1977
Motta M (2004) Competition policy. Theory and practice. Cambridge University Press, Cambridge, MA
Nevo A (2000) Mergers with differentiated products: the case of the ready-to-eat cereal industry. Rand J Econ 31(3):395–421
Oum T, Yu C, Fu X (2003) A comparative analysis of productivity performance of the world’s major airports: summary report of the ATRS global airport benchmarking research report—2002. J Air Transp Manag 9:285–297
Oum T, Adler N, Yu C (2006) Privatization, corporatization, ownership forms and their effects on the performance of the world’s major airports. J Air Transp Manag 12:109–121
Oum T, Yan J, Yu C (2008) Ownership forms matter for airport efficiency: a stochastic frontier investigation of worldwide airports. J Urban Econ 64:422–435
Parise G (2018) Threat of entry and debt maturity: evidence from airlines. J Financ Econ 127(2):226–247
Perloff JM, Karp LS, Golan A (2007) Estimating market power and strategies. Cambridge University Press, Cambridge, MA
Postert AK, Sickles RC (1999) Competition in the European airline industry. In: Gaudry M, Mayes R (eds) Tacking stock of air liberalization. Centre for Research on Transportation 25th Anniversary Series 1971–1996. Springer, Boston, pp 39–57
Röller LH, Sickles RC (2000) Capacity and product market competition: measuring market power in a ‘fat-cat’ industry. Int J Ind Organ 18:845–865
Rose NL (2012) After airline deregulation and Alfred E. Kahn. AEA Pap Proc 102(3):376–380
Rotemberg JJ, Saloner G (1986) A supergame-theoretic model of price wars during booms. Am Econ Rev 76:390–407
Sickles RC (1985) A nonlinear multivariate error-components analysis of technology and specific factor productivity growth with an application to the U.S. airlines. J Econ 27:61–78
Sickles RC, Good DH, Johnson RL (1986) Allocative distortions and the regulatory transition of the U.S. airline industry. J Econ 33:143–163
Vasigh B, Erfani GR, Sherman BW (2014) Airport performance and ownership structure: evidence from the United Kingdom, United States, and Latin America. J Aviat Technol Eng 4:40–49
Voltes-Dorta A, Lei Z (2013) The impact of airline differentiation on marginal cost pricing at UK airports. Transp Res A 55:72–88
Wang HJ, Ho CW (2010) Estimating fixed-effect panel stochastic frontier models by model transformation. J Econ 157:286–296
Zhang Z, Ciliberto F, Williams J (2017) Effects of mergers and divestitures on airline fares. Transp Res Rec 2603:98–104
Zhao Q, Choo YY, Oum TH (2014) The effect of governance forms on North American airport efficiency: a comparative analysis of airport authority vs. government branch. Transp Res Forum 53:93–110
Author information
Authors and Affiliations
Corresponding author
Editor information
Editors and Affiliations
Rights and permissions
Copyright information
© 2020 Springer Nature Singapore Pte Ltd.
About this entry
Cite this entry
Kutlu, L., Prudencio, D., Sickles, R.C. (2020). Airline Economics: A Survey of Applied Issues in the Performance of the US and International Airline Industry. In: Ray, S.C., Chambers, R., Kumbhakar, S. (eds) Handbook of Production Economics. Springer, Singapore. https://doi.org/10.1007/978-981-10-3450-3_1-1
Download citation
DOI: https://doi.org/10.1007/978-981-10-3450-3_1-1
Received:
Accepted:
Published:
Publisher Name: Springer, Singapore
Print ISBN: 978-981-10-3450-3
Online ISBN: 978-981-10-3450-3
eBook Packages: Springer Reference Economics and FinanceReference Module Humanities and Social SciencesReference Module Business, Economics and Social Sciences