Productivity change model in the airline industry: A parametric approach

Abstract

In this paper we construct a general model of the airline competition that incorporates the main variables discussed in different models of the quality of airlines competition. The model is applied to data on the domestic airlines in the Republic of Indonesia, which consists of six airlines. Although we find little evidence in support of endogenous variables, it seems that the estimated variables of all airlines are consistent with the notion that the market shares of the airlines are positively related to the main variables. The parameter results represent weights, which describe the number of appearances in the facet for each particular airline. Then, we attempt to introduce a goal programming model with constraints that are developed for estimating the parametric frontiers using translog form, and the coefficient of its objective function using the above parameter results of an airline competition model. The objective of this paper is to propose a methodology that decomposes total factor productivity change into technological progress and change in technical efficiency. The analysis of methodology provides a useful illustration of the productivity change in the airline industry.