The Research On Price Regulation Reform Of China's Civil Aviation Industry

Since the beginning of the reform and opening up era,China has experienced a gradual transition from a planned economy to a market economy.In this process,the mechanism for price determination in China's vast majority of goods and services has been switched to the market.But the price liberalization process in electricity,transportation,natural gas and other natural monopoly industries has been relatively slow,which has also been the focus and the biggest challenge in China's current price liberalization reform.Among the many natural monopoly industries,the civil aviation industry has seen the fastest pace of deregulation while simultaneously faced with challenges for further price liberalization,so it is a representative industry to study.This paper begins with an introduction of the basic conditions of China's civil aviation industry from two aspects:First,we trace and summarize the price regulation process of China's civil aviation industry;second,we describe and analyze the market structure of China's civil aviation industry.Then the motivation and impact of price regulation reforms in China's civil aviation are discussed from the following four aspects:firstly,we analyze the impact of high-speed rail on airfare liberalization;secondly,we analyze the influence of market concentration on airfare liberalization;thirdly,the impact of airfare liberalization on consumer welfare is examined;and the fourth part is to analyze the heterogeneity of airport fee reform's impact on airfares among routes with different access regulations.In order to improve the generality of the analysis,we attempt to provide theoretical foundation for all the empirical analysis in various chapters.In Chapter 4,we develop a theoretical model integrating both existing classical theories,such as public interest theory and regulatory capture theory,and the specific practices of price regulation reform in the Chinese civil aviation industry.In Chapter 5,we expand existing theories by integrating the public interest theory and regulatory capture theory into a unified analytical framework.In Chapter 7,we combine limit pricing with cost transfer to analyze the impact of airport fee reforms.Thanks to the generality of the analysis in the current paper,our research is also applicable to price regulation reforms in other natural monopoly industries.The main findings of this paper are as follows:(1)China's civil aviation industry has high market concentration.Four major airlines,including Air China,China Eastern Airlines,China Southern Airlines and Hainan Airlines,and their subsidiary airlines account for about 85%of the market.The vast majority of routes in China are sole-operator routes(77.5%),with most of the remaining routes operated by only 2-3 airlines(15.5%).And about 95%of the routes have HHI values exceeding 0.3.(2)Inter-industry competition can promote price liberalization.This paper analyzes the impact of inter-industry competition on airfare liberalization from both theoretical and empirical aspects.Theoretical analysis shows the following:The more intense competition from other industries,the higher the price elasticity of demand,leading to companies setting a lower price,which in turn reduces the regulator's concerns about airlines charging overly high prices and harming consumer welfare,thus increasing the probability of airfare cap being abolished.In particular,the theory above predicts that the routes with direct high-speed rail connections face more intense competition from ground transportation and thus are more likely to experience earlier airfare cap deregulation.Empirical analysis indeed finds that such routes have been more likely to see their airfare caps abolished,in support of the theoretical prediction that inter-industry competition can promote price liberalization.(3)Regulatory capture theory is applicable for analyzing airfare deregulation in China's civil aviation industry.This paper integrates the public interest theory and the regulatory capture theory into a unified analytical framework,and analyzes the relationship between market concentration ratio and price regulation from both theoretical and empirical perspectives.If the regulator is purely serving public interest,then in the market with fewer firms,the regulator will be more concerned that companies will charge higher prices,leading to reduced consumer welfare,and thus will be more inclined to maintain price cap regulation.If there is regulation capture,on the other hand,it will be easier to overcome the free-rider problem in the process of capture in the market with fewer firms,and thus the regulator will be more likely to eliminate the price cap regulation.Therefore,theoretically,the effect of market concentration ratio on the abolition of price cap regulation depends on the regulator's motivation.In the empirical analysis,we use flight-level data to demonstrate that on one hand,a smaller number of airlines or a higher HHI is correlated with higher airfare,but on the other hand,the routes with fewer airlines or higher HHI levels are more likely to have airfare cap abolished.These findings thus provide supporting evidence for the existence of regulatory capture during price liberalization reforms in China's civil aviation industry.(4)At the presence of high entry cost for China's civil aviation industry,airfare liberalization may reduce consumer welfare.While in a perfectly competitive market,the elimination of price caps will lead firms to charge higher prices to offset the marginal cost increase associated with increased output,resulting in an increase in output,at the presence of monopoly power,the price cap deregulation will lead the firm to increase price and cut output in order to increase profits.Therefore,the effect of abolishing the price cap regulation on output and thus consumer welfare depends on the market's degree of concentration:Whereas the deregulation may increase or decrease consumer welfare in a perfectly competitive market,lifting price caps will always harm consumer welfare in a monopolized market.The empirical research in this paper finds that abolishing the price cap regulation significantly reduces the number of flights,the number of available seats,and the volume of passenger traffic.Furthermore,the reduction effects are greater on routes with stricter entry regulation and longer distance.As the reduction in numbers of flights and seats implies decreased convenience of travel and higher airfares,airfare liberalization has led to reduced consumer welfare,with greater loss in routes with stricter entry regulation and longer distance,consistent with theoretical predictions for markets with monopoly power.Supply-side reforms such as entry barrier reduction are thus called for,before price liberation aimed at improving consumer welfare is carried out.(5)The recent airport fee reform has significantly increased airfares in air routes with more stringent access regulation,relative to other air routes.We combine limit pricing with cost transfer in the theoretical analysis to show that when a regulatory reform leads to an increase in marginal cost,markets with stricter access regulation will be more likely to pass their marginal cost increase on to prices due to less fear of entry by potential competitors.The empirical analysis shows that the implementation plan of the recent civil airport fee reform,where the passenger service fee and security fee changed from fixed charges to per passenger charges,has led to higher marginal cost and significantly higher airfare levels in routes with more stringent access regulation,thus providing support for the presence of limited pricing.