Low-Cost Entry, Inter-Firm Rivalry, and Welfare Implications in US Large Air Markets
This paper empirically analyses the patterns of inter-firm rivalry between low-cost and full service carriers by carrier and airport bases, and demonstrate welfare implication of LCC, using 1163 US cross-sectional data of 1998 when LCCs were purely no-frilled carriers. Our main findings are: (1) that both LCC and full service carriers keep higher price-cost margins when LCCs enter in the secondary airport, while especially full service carriers suffer from low price-cost margin when LCCs enter the same markets, (2) that total gains of welfare are 25.5 million USD for our dataset, and 90% of welfare gains come from the gain in consumer’s surplus. LCCs’ cumulative profit is 4.45 million USD, but full service carriers lost 1.92 million USD in total due to the competition by LCCs, (3) that LCCs sometimes provide unreasonably small (i.e, less-than-monopoly) capacities instead of profit-maximizing ones when they have no information about own demand curves.
Key Words: low-cost carrier, inter-firm rivalry, social welfare