Competition, consumer welfare and policy evaluation in airline and health care industries

Abstract

My dissertation is comprised of three essays in applied microeconomics. The first two essays focus on the airline industry and the third essay explores the health care industry. The first paper examines how a change in the network structure of an airline affects consumer welfare as well as airlines' profits. The merger wave in the last three decades, together with the associated dehubbing following mergers, has concerned many state authorities who focus on the potential negative effects on the people in the cities where dehubbings occurred. A dehubbing - which occurs when an airline ceases operations at one of its hubs - creates changes in the airline network structure that can affect both firms' costs and consumer welfare through the change in airfare as well as the change in flight service quality. In this paper, I use a modified version of the random-coefficients discrete-choice model to evaluate the overall effects of dehubbing on consumer welfare and firms' profits when United-Continental Airlines ceased its hub operation at Cleveland Hopkins International Airport in 2014. My findings reveal that airlines are successful in generating a considerable amount of cost savings and translating them into profits by re-organizing their network-structure. I also find evidence that airlines pass on some of the cost savings to consumers in the form of lower fares. In the short-run, however, consumer welfare still falls although the magnitude of average harm per person is small. In the longer run, there is a suggestive sign that consumer welfare increases because fares fall more and flight convenience also recovers as a result of other carriers add flights or new carriers enter markets at the dehubbing airport. Furthermore, the results show fares and consumer welfare do not always change in the opposite direction. In some markets, fares fall slightly and so does consumer welfare because of a deterioration in flight characteristics. This suggests an important implication that solely using fares to evaluate the impact on consumers may under or overestimate the effects of an event. Finally, this paper provides evidence of the existence of economies of density and shows that airlines tend to shift traffic to less dense routes and away from routes with high density to take the most advantage of economies of density. The second paper examines merger's effects on service quality in the airline industry. In particular, it examines the relationship between merger, collusion through multimarket contact (MMC) and intensity of competition, and how it affects airlines travel delay. Using a difference-in-difference model with carrier-market and time fixed effects, I find that travel delay worsens after the merger between Delta and Northwest Airlines. However, there is a sign that this negative effect fades over time. I also find a positive relationship between MMC and travel delay (delay increases with the extent of multimarket contact). Finally, the results also show that carriers started to take MMC into account in making their on-time performance decision following the merger. Together, these findings are in support of the mutual forbearance hypothesis and are consistent with collusion hypothesis. This paper also explores several measures of MMC to take into account that some contacts may be more influential than others. The third paper (co-authored with Pukar KC) uses the dependent coverage extension component of the Affordable Care Act (ACA) as a natural experiment to study the causal impact of health insurance provision on the consumption of preventive health care services. Using a fuzzy regression discontinuity design, we find that the policy change had no significant impact on the forms of preventive care services studied. Alternative empirical analyses conducted using difference-in-differences and propensity scores show that the general findings are insensitive to the choice of econometric methodology. Since the analysis is based on the preventive health care usage of young adults affected by the policy change, it could be indicative of moral hazard behavior specific to this age group. A theoretical framework is also devised to gauge the relation between moral hazard, insurance provision, and the usage of preventive care.