Domestic Market Power in the International Airline Industry

G. de Jong (), C.L. Behrens (), H. van Herk () and Erik Verhoef
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G. de Jong: VU Amsterdam, The Netherlands
C.L. Behrens: VU Amsterdam, The Netherlands
H. van Herk: VU Amsterdam, The Netherlands

No 17-009/VIII, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: We posit and empirically test the hypothesis that airlines are able to charge a fare premium in markets that originate in their domestic country relative to similar markets that originate in foreign countries. To this end, we focus on intercontinental one-stop air travel trips for which the main, intercontinental, flight legs are identical, while the feeder legs depart from a mixture of domestic- and foreign origins. We collect a unique database of published fares for such trips and estimate reduced form fare regressions with main flight leg fixed effects. We find that trips from and to domestic airports (compared with foreign airports) are characterized by about 9.5 per cent higher fares, even after adding controls for airport dominance, trip operating costs, the competitive environment and origin catchment area characteristics. These findings demonstrate that airlines have substantial domestic market power, enabling them to raise fares at their domestic airports irrespective of aforementioned market conditions. The magnitude of this domestic country effect is large relative to the traditional airport dominance effect, suggesting that the distinction between domestic- and foreign origins is a crucial determinant of the degree of market power that airlines can exert in the international airline industry.

Keywords: market power; airline competition; price discrimination; international aviation (search for similar items in EconPapers)
JEL-codes: L11 L13 L93 R40 (search for similar items in EconPapers)
Date: 2017-01-13, Revised 2018-03-20
New Economics Papers: this item is included in nep-com, nep-mkt and nep-tre
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Journal Article: Domestic Market Power in the International Airline Industry (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:tin:wpaper:20170009

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