Essays on the industrial organization of the airline industry

Abstract

This thesis analyzes several aspects of the Industrial Organization of the airline industry in three separate chapters. Chapter 1 investigates the effect of air traffic delays on airline prices. The degree to which prices respond to changes in service quality should depend on consumers' willingness-to-pay for quality, as well as the availability of substitute products. I study the effect of an exogenous variation in on-time arrivals, as one dimension of service quality in the airline industry, on prices for airline travel. The effect is identified from a legislative change in takeoff and landing restrictions at La Guardia Airport in New York City in the year 2000. I find that prices drop in reaction to longer flight delays. The price response is larger when a close substitute flight is available. Increased flight delays at La Guardia have a positive effect on prices at other New York City Metropolitan Area airports, which offer substitute products. In quantile regressions on thedistribution of prices, I show that prices at the upper end of the distribution react more strongly to flight delays. In Chapter 2, I study how airline passenger complaints are related to actual and expected service quality of air carriers. In contrast to the existing studies on customer complaints, I do not derive consumers' expectations from survey data. Instead, I use the best prediction at the time of purchase given the information available at that time as the consumer's rational expectation of service quality. I find that passengers file more complaints when an airline's actual service quality is lower and when expected quality is lower. These effects are quite robust across different econometric specifications. Considering the magnitudes of the effects, I find that the effects of actual quality and of expectations on complaints are of similar magnitude. Chapter 3 tries to understand the recent market entry and expansion by a group of small carriers, often labeled low-cost carriers. As a first step in analyzing the competitive strategy of these carriers, we investigate the effect of a carrier's and its competitors' existing presence at the endpoints of a routes on the likelihood of entry.