Carrier Market Research Articles

NETWORK EFFECTS AND SWITCHING COSTS IN THE U.S. WIRELESS INDUSTRY

AbstractI estimate a model of dynamic consumer behavior to disentangle switching costs and network effects in the U.S. wireless industry. A detailed panel on market shares and churn rates, disaggregated by demographic consumer types and local markets, allows me to separately identify preference heterogeneity, switching costs, and a localized direct network effect. My switching cost estimates range from USD 47 to USD 178. The average willingness‐to‐pay for a 15 percentage point increase in a carrier's market share is USD 8.50 per month. Finally, I show that ignoring either one of the effects results in substantial errors when simulating counterfactuals.

THE EVOLUTION OF LOW COST CARRIERS IN AUSTRALIA

Due to the vast distances across the country as well as between urban centres, Australia is heavily reliant upon its air transport industry. Following deregulation of Australia's domestic air travel market on the 30th October, 1990, low cost carriers have entered the market. Australia's LCC market has had three discrete phases. The first wave occurred between 1990 and 1993 and was subsequently followed by a duopoly period in 1994–1999. The second wave occurred between 2000 and 2006 and the final wave has been in the post-2006 period. This paper examines the evolution of Australia's domestic low cost carrier airline market and finds that by 2010, low cost carriers had captured around 64 per cent of the market. Following the evolution of the “Virgin Australia” business model from a low cost carrier to a full service network carrier, commencing in 2011, the low cost carrier's market share has declined significantly and is now around 31 per cent. “Jetstar” and “Tiger Airways” are the two major carriers presently operating in this market segment.

Market failure or market efficiency?: Evidence on airport slot usage

Beginning in 1986, the FAA has allowed the rights to take off or land at the four “High Density Traffic Airports” (HDTAs), known as “slots,” to be sold or traded for any consideration. Opponents of this system have alleged that the slot markets are prone to various forms of “market failure.” The main allegations have been that dominant carriers at the HDTAs have been “hoarding” slots in order to generate higher than competitive prices for airline services. This article attempts to test empirically the various anticompetitive hoarding hypotheses by examining slot ownership and usage data at the most concentrated HDTA, Chicago's O’Hare airport. In general, we find a positive and significant relationship between the rate at which a carrier uses a slot and the carrier's market share. This is consistent with a theory of efficient use of slots by carriers owning a large share of the slots at a HDTA. In addition, there is no evidence that the two largest carriers are using leasing as an anticompetitive device. On the other hand, our results concerning capacity usage are consistent with both hoarding and efficiency hypotheses. Taken as a whole, however, the statistical evidence presented here is more consistent with the hypothesis that efficiency considerations were generating concentration at O’Hare.

Air carrier demand

Modeling air carrier demand is instrumental to understanding the relative importance of competitive forces that shape the airline environment and determine a carrier's market share. This paper develops a conceptual framework for analyzing carrier demand in a competitive context and applies that framework to study air carrier choice. This framework can be used by carriers to assess the market share and revenue implications of service design, pricing, marketing, and promotional strategies. We adopt an individual traveler choice approach to identify and measure the relative importance of factors which influence air travel demand. Travelers' patterns of air travel, perceptions of carrier service, frequent-flyer program membership, and carrier choice behavior are used to estimate models of individual carrier choice. These models indicate the importance of carrier presence in the origin market, carrier service in a city pair market (share of flights), carrier quality of service reflected in ratings by individual travelers, and traveler loyalty reflected in frequent-flyer program membership on carrier choice. The importance of these variables and the specific quantitative relationship estimated, can be used to estimate the market share impact of service design, pricing, marketing, and promotional changes. The empirical results of this study demonstrate the dramatic impact of frequent-flyer program participation on carrier choice for individual flights. These effects are particularly strong among the most important air carrier market, the frequent business traveler.

Living by the "Golden Rule": Multimarket Contact in the U. S. Airline Industry

This paper examines empirically effects of multimarket contact on pricing in U. S. airline industry. The analysis of time-series and cross-sectional variability of airline fares in 1000 largest domestic city-pair routes reveals presence of statistically significant and quantitatively important multimarket effects—fares are higher in city-pair markets served by carriers with extensive interroute contacts. These findings are consistent with claims of industry experts that airlines live by golden rule; i.e., that they refrain from initiating aggressive pricing actions in a given route for fear of what their competitors might do in other jointly contested routes. During his testimony, Mr. Steven B. Elkins (Senior Director of marketing systems development for Northwest Airlines) cited an example in which Northwest lowered fares on night flights that were flying with empty seats in a number of routes from Minneapolis and Upper Midwest cities to various West Coast cities. He said that Continental Airlines swiftly responded by cutting prices in important Northwest markets … Mr. Elkins's memo advises Northwest pricing analysts: We Will Live by Golden Rule! In his testimony, he explained that, the Golden Rule in that context was that I did not want my pricing analyst initiating actions in another carrier's market like Chicago for fear of what that other carrier might do to retaliate [Wall Street Journal, October 9,1990, p. B1].

Market Power and the Northwest-Republic Airline Merger: A Residual Demand Approach

After the Airline Deregulation Act of 1978, airline mergers helped create hub-and-spoke route systems. These systems allow flights to be fed into a single city, increase the number of seats filled on each flight and, therefore, increase an airline's efficiency. On the other hand, the hub may allow an airline to dominate its home airport and, in so doing, increase its ability to raise fares above competitive levels. A positive relation between fares and concentration is well known, yet concentration alone is not the relevant issue. Rather, it is the potential increase in carrier market power, beyond pre-merger levels, that determines whether mergers pose a threat to social welfare. It is unknown whether mergers that create dominant hubs cause such increases in a carrier's market power. To this end, we provide a direct econometric procedure for estimating this change in market power and, therefore, for examining whether any given merger should be approved. We (1) refine Baker and Bresnahan's [3] market power test to examine the airline industry and control for firm self-selection;' and (2) use pre-merger data to predict the change in market power, if any, that results from the merger of Northwest and Republic at their hub Minneapolis-St. Paul airport. We obtain three main results: First, by itself, Northwest possesses a large degree of market power at its Minneapolis-St. Paul hub; but, a merger with Republic will slightly reduce its ability to raise fares above competitive levels. Second, we find Republic, by itself, cannot control price; but merged with Northwest's complementary route system, it obtains substantial market power. Third, the merger is predicted to increase Republic's market power whether or not overlap service is provided by Northwest. In all, any increase in market power from this merger derives principally from its impact on Republic.