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Rev Ind Organ (2014) 44:125 DOI 10.1007/s11151-012-9371-7
City-Pairs Versus Airport-Pairs: A Market-Denition Methodology for the Airline Industry
Jan K. Brueckner Darin Lee Ethan Singer
Published online: 1 January 2013 Springer Science+Business Media New York 2012
Abstract This paper provides a methodology for deciding which airports warrant grouping in multi-airport metropolitan areas. The methodology is based on the comparability of incremental competition effects from nearby airports on average fares at a metropolitan areas primary airport. Results from a quarterly panel data set for the period 20032009 provide strong evidence that city-pairs, rather than airport-pairs, are the appropriate market denition for analyses of passenger air transportation involving many (but not all) large metropolitan areas. Based on the proposed method, we offer a recommended list of airports that should be grouped when creating city-pairs for the analysis of competition in the US domestic airline industry.
Keywords Airports City-pair Market denition
1 Introduction
In the vast empirical economics literature on the airline industry, researchers typically study the impact of the characteristics of an airline market on market outcomes, usually airfares. In carrying out such studies, researchers must rst answer a crucial question:
J. K. BruecknerDepartment of Economics, University of California, 3151 Social Science Plaza, Irvine, CA 92697, USA e-mail: [email protected]
D. Lee (B)
Compass Lexecon, 200 State Street, 9th Floor, Boston, MA 02109, USA e-mail: [email protected]
E. SingerDepartment of Economics, University of Minnesota, Twin Cities, 4-101 Hanson Hall, 1925 4th Street South, Minneapolis, MN 55455, USAe-mail: [email protected]
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2 J. K. Brueckner et al.
how to dene the relevant market? While the answer seems obvious on one level(i.e., a market involves travel between two cities), the market-denition question is less straightforward when it is recognized that the largest cities are vast metropolitan areas that often contain several commercial airports that compete for passengers. Then, the issue is whether these multiple airports should be grouped and viewed as a single destination for passengers, or whether each of the multiple airports should be treated as a separate destination. When the rst approach is followed, city-pairs constitute airline markets, while under the second approach, markets are taken to be airport-pairs.1
Market denition is a crucial factor that guides government regulatory decisions regarding the airline industry. For example, in evaluating proposed airline mergers,...