What Drives Effective Competition in the Airline Industry? An Empirical Model of City-Pair Market Concentration

Abstract

Market concentration is a widely recognized metric of effective competition, as it provides a quantification of the relative success of large, mid-sized and smaller firms in the battle for consumers. Concentration has been a public policy issue in the airline industry since deregulation due to the long-standing airport dominance by major carriers, which is a concern that is recurrently intensified by merger announcements. This paper develops an empirical model to examine the evolution of concentration in the airline markets and its possible drivers. We analyze the case of the Brazilian airline industry in which the two major carriers acquired a combined market share of more than 90% in the late 2000s and have experienced a sharp reversion since then. We test the effects of traffic density and route-airport dominance of flight frequencies on the Herfindahl-Hirschman index (HHI) of city-pair markets. Additionally, we investigate the effects of a potential intensification of airport-dominant airlines’ vertical relationships after airport privatization. Our estimated scenarios reveal that a long-run decline in flight dominance produced a ceteris paribus 23% decrease in the estimated HHI. Additionally, market expansion induced an extra 4% decline in concentration. In contrast, ownership change at privatized airports raised concentration by 9%. Our results also suggest that fighting market concentration with the entry facilitation of new low-cost carriers at primary airports may be an effective policy.