Three essays on competition and market power in airlines' hub-and-spoke networks
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In this dissertation, I investigate hub carriers' competitive advantage in directional markets within their hub and spoke networks. In the first chapter, I examine whether the competitive advantage of hub carriers in attracting hub-to-spoke passengers relative to spoke-to-hub passengers affects rivals' entry decisions in a symmetric way. The hub carrier advantage in attracting passengers at its concentrated hub airport creates an environment in which variation in the composition of demand in hub-to-spoke markets affects entry in a profoundly different way than demand variation in spoke-to-hub markets. In the second chapter, I examine hub carrier fares and price-cost margins in hub and spoke airport pairs. Exploiting variation across airport-pairs, I find that an increase in the proportion of business travelers in hub-to-spoke markets increases fares in these markets, while an increase in the proportion of business travelers in spoke-to-hub markets decreases fares. This result is consistent with the structural asymmetries found in the first chapter. However, the source of these concentration advantages remains ambiguous. These advantages could be due to cost benefits, demand effects, or market power. Exploiting the variation between hub-to-spoke and spoke-to-hub markets within airport pairs isolates the market power effect on fares. I find that difference in hub carrier airport shares explains most of the variation in its hub-to-spoke and spoke-to-hub price-cost margins. Unobserved quality and cost heterogeneity do not bias the result. In the final chapter we look at the relationship between market power and price discrimination. In the presence of price discrimination, at least one price does not equal marginal cost. Therefore, if price discrimination exists, there must be market power. While this logic is sound, it has led many policymakers to believe that price discrimination and market power are positively correlated. We present a model where measured price-discrimination can be low while market power is high and price discrimination can be high while market power is low, thus demonstrating that there is no theoretical connection between the strength of price discrimination and that of market power. We then present new evidence that price discrimination is negatively correlated with market power in the US airlines industry.