Price and Frequency Choice under Monopoly and Competition in Aviation Markets

Abstract

Using data on 172 city-pair markets in eight European countries, we investigate the effect of the market structure on airlines choices of frequency and prices. Applying an address model, we show that equilibrium prices depend on passengers value of time, marginal flight costs and the aggregate number of flights. Furthermore, we show that under monopoly the equilibrium price is higher and the aggregate frequency is lower than under competition. The estimations 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, we find 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 we can reject the hypothesis of differences in equilibrium price. 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 we can reject the hypothesis that the aggregate frequency is the same under monopoly as it is under competition; the aggregate frequency under monopoly is found to be much lower.