Low-Cost Entry, Inter-Firm Rivalry, and Welfare Implications in Large U.S. Air Markets


In this paper we analyze empirically the patterns of inter-firm rivalry between low-cost carriers (LCCs) and full-service carriers (FSCs) by carrier and airport base, and demonstrate what the social welfare gains were, using 1163 samples of U.S. cross-sectional data of 1998. Our main findings are: (1) that both LCCs and FSCs maintained higher price-cost margins especially when LCCs used secondary airports, (2) that total gains of welfare were 25.5 million USD for our dataset, and 90% of welfare gains came from the gain in consumer surplus, and (3) that LCCs sometimes set more-than-monopoly prices instead of profit-maximizing ones.
Key Words: low-cost carrier, inter-firm rivalry, social welfare

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