Price Competition and Endogenous Product Choice in Networks: Evidence from the US Airline Industry

Joint with Christian Bontemps (ENAC & Toulouse School of Economics) and Kevin Remmy (University of Mannheim).

Abstract

We build and estimate a two-stage model of airline competition in which firms first form the networks of markets to be served and then compete in prices. We estimate our model using fares data on US domestic flights. We show that large hub-and-spoke operations lower marginal costs but increase fixed costs. We evaluate a merger between American Airlines and US Airways. We also evaluate remedies imposed by the Department of Justice on the merging parties.