The short and long run effects of entry on U.S. domestic air routes.

18 For example, if the price on a route should increase, one might expect entry onto that route and, consequently, a decrease in the Herfindahl Index. Price increases would also be expected to lead to a passenger decline on a route, all other factors held fixed. The fact that fluctuations in the left side variable can reasonably be expected to cause changes to right side variables results in biased coefficient estimates when using ordinary least squares. Instrumental variable estimation reduces these biases in large samples, with a limit of zero bias as the sample approaches infinity. The sum of income at the two end points and the sum of population at the two end points were used as instruments. Multiplying the values of income and population at the end points together to create the instruments did not affect the results.

19 Using data from 1981, Bailey, Graham, and Kaplan, Deregulating the Airlines, 1985, found that route concentration, as measured by the Herfindahl Index, positively influenced prices on U.S. domestic air routes. As with our Model 1, Bailey, Graham, and Kaplan did not include carrier dummies in their estimation. Note that the results of Borenstein, "Hubs and High Fares: Dominance and Market Power in the U.S. Airline Industry," 1989, and others, indicating that market concentration can lead to higher prices, are not necessarily in conflict with our results. Borenstein found that a carrier with a high market share on a route (his definition of market concentration) led to higher prices for that carrier. Our definition of concentration differs from that of Borenstein and our results focus on average prices for all carriers on a route.

20 Douglas W. Caves, Laurits R. Christensen, and Michael W. Tretheway, "Economies of Density versus Economies of Scale: Why Trunk and Local Service Airline Costs Differ," Rand Journal of Economics, Vol. 15, Winter 1984, pp. 471-489, found that airlines face economies of density; that is, increased passenger density on a given route leads to reductions in unit costs.

21 Elizabeth E. Bailey, David R. Graham, and Daniel P. Kaplan, Deregulating the Airlines, 1985.

22 Diana L. Strassmann, "Potential Competition in the Deregulated Airlines," 1990.

23 Randall D. Bennett and James M. Craun, "The Airline Deregulation Evolution Continues: The Southwest Effect," 1993.

24 Ibid.

Mr. Windle is associate professor of transportation, business and public policy and Mr. Dresner is associate professor of transportation, business and public policy, College of Business and Management, University of Maryland, College Park, Maryland 20742.

Print Get the Mag Weekly Updates