Motivation

1
MEASURING CONDUCT AND COST PARAMETERS IN THE
SPANISH AIR TRANSPORT MARKET Xavier Fageda Grup
de Recerca en Polítiques Públiques i Regulació
Econòmica. Institut de Recerca en Economia
Aplicada Universitat de Barcelona

• where
• q demand
• p prices
• pop population
• Inc income per capita
• Disland dummy variable that takes value 1 for
  routes with an island as an endpoint.
• Dintermodal dummy variable that takes value 1
  in routes with an island as an endpoint and/or in
  routes whose distance is more than 650
  kilometres.
• dist distance
• The estimation of this equation allows measuring
  the average degree of collusion (?) and the
  average degree of density economies (?).
• In addition, we estimate two alternative
  specifications of the pricing equation, where
• 1) ? depend on variables related to market
  concentration on the route and on the airports
  and tourist intensity
• 2) Demand is disaggregated into the frequency,
  the load factor and the average aircraft size.
• Conclusions

• Motivation
• The worldwide liberalisation of air transport
  services has been considered one of the most
  successful experiences in the wider process of
  regulatory reform.
• However, there is a consensus in the academic
  literature that benefits of liberalisation depend
  fundamentally on the existence of an effective
  competition on the markets where airlines
  compete the air routes that link city pairs.
• In this context, the two typical market
  structures that have emerged in the domestic
  markets of the European Union are monopolies and
  asymmetric oligopolies.
• This paper estimates a model of airline
  competition for the Spanish air transport market
  in order to examine airlines behaviour under
  these market structures.
• Aims
• Route traffic density normally determines the
  particular strategic scenario. Indeed, oligopoly
  with a dominant firm is the predominant market
  structure in thick routes. Monopoly is the
  predominant market structure in thin air routes.
  In addition, it must be said that airlines face
  capacity constraints as long as main European
  airports are currently congested. In this
  context, our main goals are the following
• 1) For thick routes, I test the explanatory power
  of alternative oligopoly models with capacity
  constraints. In particular, I test if price
  competition is à la Cournot (Kreps and
  Scheinkman, 1983) or follows a leader-follower
  scheme (Deneckere and Kovenock, 1992).
• 2) For thin routes, I analyse the degree of
  density economies to assess whether thin routes
  should be considered as natural monopolies
• Methodology
• We deal with these issues through an empirical
  model of competition that is estimated for a
  representative sample of routes of the Spanish
  market in the period 2001-2002, using demand and
  cost information. It is needed to mention that
  the results of this particular study can be
  expanded to the rest of the European Union
  because the Spanish market is the largest
  domestic market in this area.
• Our empirical model is based on a simultaneous
  estimation of a demand and pricing equation for
  monopoly and oligopoly routes (k) in period (t)
• Demand equation log(qkt) a0 a1log(popkt)
  a2log(inckt) a3Dislandk ?0pkt
  ?1Dintermodalkpkt edkt