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Competition in Deregulated Airlines Markets.

Competition in Deregulated Airlines Markets

The NBER held a conference on Competition in Deregulated Airlines Markets on May 12 in Cambridge. Research Associate Timothy F. Bresnahan, Stanford University, organized the following program:

Steven Berry, Yale University, "Estimation of a Model

of Entry in the Airline Industry"

Discussant: Robert Porter, Northwestern University

Michael Whinston, NBER and Harvard University,

"Entry, Contestability, and Deregulated Airlines

Markets: An Event Study Analysis"

Discussant: Ariel Pakes, NBER and Yale University

Gloria Hurdle, Richard Johnson, Andrew Joskow,

Gregory Werden, and Michael Williams, U.S.

Department of Justice, "Concentration, Potential

Entry, and Performance in the Airline Industry"

Discussant: Bronwyn H. Hall, NBER and University

of California at Berkeley

Severin Borenstein, University of Michigan, and

Nancy L. Rose, NBER and MIT, "Price Discrimination

in Airline Markets"

Discussant: Mark Roberts, Pennsylvania State


Berry considers the effect on an airline's profitability of its scale of operation in an airport. He treats the observed decisions of firms to enter airports as an indication of underlying profitability. Underlying firm profits are allowed to vary with the endogenously determined number of firms and with firm heterogeneity. Berry's results indicate that city-pair profits depend on the scale of airport operation and on the number of entering firms.

Whinston examines stock price reactions to announcements of entry into airport-pair markets by People Express airlines in 1984 and 1985. He shows that incumbents on entered routes suffer significant reductions in stock value on the announcement dates. Prices of other airline stocks do not fall on those days. This suggests that a significant degree of localization in competition prevents a general dissipation of the effects of entry. Also, there is some evidence of value losses associated with operations at the newly entered airport.

Hurdle and her coauthors study the effect of potential entry on performance in airline markets. They find that the best measure of market concentration takes into account not only the number and size distribution of incumbents, but also the number of potential entrants not significantly disadvantaged because of economies of scale and scope. They find that the threat of entry keeps airlines from raising their fares in contested markets.

Borenstein and Rose investigate the dispersion in prices paid by different customers of a given airline on a given route. They find an average difference in fares for two passengers on a route of more than 30 percent of the airline's mean ticket price on the route. Moreover, the pattern of price dispersion is not explained solely by differences in the costs of serving different passengers. Dispersion is higher on more competitive routes and higher for carriers with smaller route shares. Airport dominance by a carrier tends to raise price dispersion, which may reflect the enhanced effectiveness of "frequent flyer" plans as a discriminatory device. Markets with higher flight density tend to exhibit less dispersion, as do markets dominated by tourist traffic.

Also attending the conference were: Geoffrey Carliner, NBER; Dennis W. Carlton, NBER and University of Chicago; Richard E. Caves and Pankaj Ghemawhat, Harvard University; Zvi Griliches, NBER and Harvard University; Paul L. Joskow, NBER and MIT; Alfred E. Kahn, Cornell University; Melanie Mauldin, University of California at Berkeley; Thomas G. Moore, Council of Economic Advisers; John C. Panzar, Northwestern University; Peter C. Reiss, NBER and Standford University; Richard Schmalensee, MIT; and Jack Wells, General Accounting Office.
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Title Annotation:Conferences
Publication:NBER Reporter
Date:Jun 22, 1989
Previous Article:Conference on Social Insurance.
Next Article:Conference on Political Economy.

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