EMPIRICAL RESEARCHES ON PRICE AND QUALITY COMPETITION IN THE U.S. AIRLINE INDUSTRY

Abstract

My dissertation chapters are empirical researches on the U.S. airline industry. In the first chapter, I use different discrete choice models to study major carriers’ decisions on outsourcing their service to smaller regional carriers. First, I find that limited market size and fierce market competition are main reasons for major carriers to choose complete and partial outsourcing respectively. Regarding the choice of partners, I find that major carriers are more likely to choose fully-owned regional subsidiaries on more competitive routes. Finally, I find that partial outsourcing does not really give major carriers extra advantage in price competition with low cost entrants. Chapter 2 is a joint paper with my co-advisors Dr. Qihong Liu and Dr. Myongjin Kim. It is about the pass-through of jet fuel price to airline passengers. We find that airline fares are affected by both current and lagged fuel price, and airlines transfer more cost burden to passengers on less competitive routes. We have tried to estimate the level of pass-through and get a value over 100%, which means per dollar increase in fuel cost will increase market fare by more than one dollar. The third chapter is also related to regional outsourcing. Based on the underlying finding in the literature that outsourcing to fully owned subsidiaries improve the quality of service, I check the response of carriers in price and quantity when changes happen to the ownership structure of their competitors’ regional partners, i.e. when integration / de-integration takes place. Both changes seem to increase the quality gap between major and low cost carriers as major carriers always have stronger incentive and richer resources to keep the quality of their service. And enlarged vertical differentiation tends to mitigate price competition when vertical integrations happen.