Equilibrium and Welfare in Unregulated Airline Markets

An analysis is made of how unregulated airline markets can be expected to perform. The basic results of a monopolistically competitive model of airline markets are: 1. When the direct benefits to consumers of increasing flight frequency are exhausted, socially optimal choices of price and frequency...

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Bibliographic Details
Published in:The American economic review 1979-05, Vol.69 (2), p.92-95
Main Author: Panzar, John C.
Format: Article
Language:English
Subjects:
Airline industry
Airlines
Applied Welfare Theory
Choices
Civil aviation
Consumer economics
Consumer prices
Departure time
Deregulation
Economic models
Equilibrium
Frequency
Load forces
Marginal social costs
Market prices
Markets
Maximization
Monopolistic competition
Nash equilibrium
Optimum
Prices
Vehicular flight
Welfare
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Summary:An analysis is made of how unregulated airline markets can be expected to perform. The basic results of a monopolistically competitive model of airline markets are: 1. When the direct benefits to consumers of increasing flight frequency are exhausted, socially optimal choices of price and frequency result in zero profits for the industry. 2. A noncooperative, free entry equilibrium always results in higher prices, lower load factors, and greater frequency than are socially optimal. The divergence between the Nash equilibrium and a zero profit welfare optimum suggests that, in theory, a policy of price regulation and free entry would produce higher welfare than a policy of complete deregulation. Whether or not the current unwieldy regulatory apparatus is retained in order to improve market performance must ultimately depend upon the quantitative divergence of the unregulated equilibrium from the welfare optimum. Intelligent policy formulation requires accurate estimation of structural air travel demand functions capable of isolating the effects of frequency and load factor as well as price.
ISSN:0002-8282
1944-7981