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Network Effects of Air Travel Demand, Second Version

Yanhao Wei ()
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Yanhao Wei: Department of Economics, University of Pennsylvania

PIER Working Paper Archive from Penn Institute for Economic Research, Department of Economics, University of Pennsylvania

Abstract: As demand increases, airline carriers often increase flight frequencies to meet the larger flow of passengers in their networks, which reduces passengers' schedule delays and attracts more demand. Focusing on the “network effects", this paper develops and estimates a structural model of the U.S. airline industry. Compared with previous studies, the model implies higher cost estimates, which seem more consistent with the unprofitability of the industry; below-marginal-cost pricing becomes possible and appears on many routes. I also study airline mergers and find that the network effects can be the main factor underlying their profitability.

Keywords: Network effects; airline networks; differentiated product markets; airlines; merger (search for similar items in EconPapers)
JEL-codes: C31 D62 L13 L93 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2014-09-25, Revised 2014-11-17
New Economics Papers: this item is included in nep-com, nep-net, nep-tre, nep-tur and nep-ure
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