Demand, Market Structure, Entry, and Exit in Airline Markets
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The airline industry is a major driver of economic activity in the United States, accounting for over $1 trillion annually. In this work, I study the airline industry and analyze several key economic issues facing the industry. I examine the industry from several different angles, looking at consumer behavior, firm behavior, and market performance. The body of the dissertation comprises three essays, with each essay focusing on one of the aforementioned facets of the industry. The first essay is a study of consumer demand, using aggregate data to estimate consumer utility functions and identify preferences for airports in large, multi-airport markets. Using these utility functions, I produce tables of cross-airline and cross-airport elasticities, measuring how consumers would be expected to substitute between airports in response to airline price increases and substitute between airlines in response to airport price increases. The second essay is a study of market structure and pricing. I look at changes in market structure over a 20 year time period, focusing on the price effects of entry, exit, and mergers. By looking at both the direct effects as well as the subsequent effects on market concentration, I find that there is tremendous heterogeneity in the effects of these events across markets. The final essay is a model of firm entry and exit decisions in a network environment. I use this model to analyze firm decisions in the airline industry. I find that the size and geographic distribution of firms' networks plays an important role in their decision to further expand or contract, as firms with larger networks are more likely to expand, while firms with smaller networks are more likely to contract. Together, this body of work presents an in-depth analysis of the economic issues surrounding the airline industry. This dissertation includes both previously published and co-authored material.