Working Paper: CEPR ID: DP4318
Authors: Philippe Gagnepain; Pedro L. Marn
Abstract: The aim of this Paper is to evaluate simultaneously market power and the incentives faced by carriers to improve efficiency, taking into account the regulatory changes that have affected the European airline industry. We construct and estimate a model that includes demand, capacity, and cost equations. The latter accounts for inefficiency and cost-reducing effort. Using a non-nested test and observations on the largest European airlines between 1985 and 1999, we show the importance of following such an approach. We also find that the introduction of the last EU package of deregulatory measures has affected carriers? behaviour in a significant manner.
Keywords: airlines; competition; efficiency; incentives; regulation
JEL Codes: L13; L43; L93
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Last EU package of deregulatory measures in 1992 (F15) | Significant increase in cost-reducing efforts by airlines (L93) |
| Deregulation process (L51) | Notable change in behavior of airline carriers regarding efficiency improvement (L93) |
| Deregulation process (L51) | Increased competition among airlines (L93) |
| Deregulation process (L51) | Tougher competition than standard oligopoly model suggests (D43) |