Moshe Cohen

Estimation of a Dynamic Oligopoly Entry Game in the U.S. Airline Industry: Hubs, and LCC

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Abstract:

Airlines choose the domestic markets — city pairs — they serve and the prices they charge given the structure of their network and the networks of rival airlines. I cast this choice into a dynamic oligopoly entry game to recover the fixed and variable operating costs, entry costs, and profits, using a panel of 20 quarters of DB1B and T-100 Domestic Segment Data. These estimates are then used to analyze the strategic and cost saving effects of hubs, and LCC. I find that while hubs produce benefits consumers value which translate into higher variable profits, but when including fixed costs their desirability is much less clear even in hub markets.  LCC, and especially Southwest and JetBlue are especially attractive to consumers, have lower marginal costs and have a strong negative impact on the profits on the incumbents in the markets they serve.

Source: Working Paper
Exact Citation:
Cohen, Moshe. "Estimation of a Dynamic Oligopoly Entry Game in the U.S. Airline Industry: Hubs, and LCC." Working Paper, Columbia Business School, February 21, 2010.
Date: 21 2 2010