An Examination of Airline Pricing: Testing the Effects of Mergers and Uncertainty on Average Fare and Dispersion

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  • March 19, 2019
Creator
  • Macdonald, John Archibald
    • Affiliation: College of Arts and Sciences, Department of Economics
Abstract
  • This dissertation uses data from the late 1980s to examine pricing, mergers, and market concentration in the airline industry. It is motivated by a current airline pricing theory that predicts prices dispersion is increasing with demand uncertainty and costly capacity. This theory directs my analysis towards three concurrent goals. First, I provide quantifiable figures for uncertainty in airline pricing. Second, I empirically establish the relationships between airline price dispersion and uncertainty, competition, and costly capacity. And third, I attempt to evaluate the effects mergers have on average fares and fare dispersion in the airline industry. Two key results obtained in the analysis contradict the theory: uncertainty is found to negatively impact dispersion, and average fares are found to fall with mergers. The former casts doubt on the applicability of the theory, while the latter suggests efficiency gains can be expected to outweigh market power abuses following a merger. While these results cannot definitively disprove the going theories, they call into question the true roles demand uncertainty and competition play in the specific case of the airline industry. The empirical analysis is followed by a detailed discussion of the drawbacks inherent in the current theory’s underlying assumptions and key results. Potential alternate applications of demand uncertainty theory are also explored. Finally, I present the groundwork for a new concept of residual supply as a determinant of airline pricing.
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  • In Copyright
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  • Stewart, John F.
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  • Open access
Date uploaded
  • October 19, 2010

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