Time Effect of Low-Cost Carrier Entry and Social Welfare in US Large Air Markets


In this study we empirically analyzed the airfare level at which most low-cost carriers (LCCs) entered the market, what impacts LCCs had on the airfares of incumbent carriers, whether the impacts differed depending on how many LCCs existed in a market and on whether LCC(s) entered a full-service carrier (FSC)’s hub airport or an adjacent airport, whether the low-airfare impact continued for the years following entry, and finally what are the welfare implication of LCCs’ entries. We modeled and estimated the simultaneous demand and price (pseudo-supply) equation to derive these four economic impacts of LCCs’ entries by using published data of 1998. Our main findings are: (1) overall, LCCs entered with very low airfare, and their entry lowered the full-service carrier’s airfare, but the impacts of entries depended on individual LCCs; (2) neither the number of LCCs nor the location of entry by LCC(s) had different impacts; (3) the impact of LCCs’ entries did not differ between the entry year and the second year; (4) the social welfare gains are substantial, and 90% of welfare gains come from the gain in consumers surplus.

Key Words: LCC, impact on airfare, time effect of entry, social welfare

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