Contestability and public concern about airfares: A case study in the Canary Islands

Javier Campos, Juan Jiménez González and Jordi Perdiguero

Transport Policy, 2015, vol. 42, issue C, 180-186

Abstract: This paper studies – both from a theoretical and empirical perspective – a case of contestability in the Canary Islands' domestic air transport market. We show how after the exit of its rival in an initially duopolistic market, the remaining airline did not increase its prices in order not to provoke the entry of new rivals. According to our view, this result was explained by the ‘public concern’ that was created about the incumbent's behaviour and its attempt of presenting itself as a benevolent monopolist. However, its strategy failed and a new operator finally entered the market, with a subsequent drop in average prices. We prove our hypothesis by developing a theoretical multi-route oligopolistic model with differentiated services and by testing its implications using several difference-in-difference econometric techniques on a monthly prices database collected in 2012–2013.

Keywords: Air transport; Canary Islands; Entry and exit; Difference in difference (search for similar items in EconPapers)
JEL-codes: C50 L41 L93 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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DOI: 10.1016/j.tranpol.2015.06.006

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