Essays on Airline Competition and Network Structure

The dynamics of airline deregulation have resulted in significant changes in airline competition and network structure. This dissertation examines airline competition and network structures in the presence of low-cost entry in a deregulated environment.;In Essay Two the model is extended to a duopolistic airline market in which network structures are endogenously determined by the competition between two incumbent airlines; numerical exercises are then used to demonstrate how the threat of entry by a low-cost airline affects the network choices of these incumbent carriers. The main result of the essay is that, in many situations, incumbent carriers restructure their networks in order to compete with potential entrants. The results indicate that incumbents' response to the threat of entry depends on the potential entrant's cost advantage and on the fixed costs of connecting city pairs. In particular, if the fixed costs of connecting city pairs are low and the cost advantage of the entrant is significant then entry may not affect the network structure of incumbent carriers. However, at higher fixed costs at least one incumbent will adjust its network in an attempt to soften the competitive effect of entry. Furthermore, the numerical exercises show that the threat of entry not only affects the equilibrium network structure but may also result in one incumbent leaving the industry and the potential entrant actually entering.;Essay Three studies network competition and welfare implications in partially and fully liberalized transatlantic markets using the model developed in Essay Two. This essay illustrates some conditions under which the price and welfare effects of an open-skies agreement depend on the equilibrium network choice of the competing airlines. In particular, network choices of airlines may result in higher prices on some transatlantic routes and if pre-liberalized domestic markets are competitive price reductions on domestic routes could be negligible. Another finding is that the opening of transatlantic markets mainly redistribute airlines' market shares and as a result the expected increase in passenger traffic may not be realized.;The first chapter investigates the effect of low-cost entry on the equilibrium network choice of a monopolistic air carrier. This essay differs from previous analyses in that it incorporates asymmetric city sizes, and distances as a determinant of costs into the model. Numerical exercises illustrate that the threat of entry may result in an entry accommodating, an entry deterring or even an interlining equilibrium, depending on demand and cost conditions and on the level of fixed costs of connecting city pairs. In particular, when the demand in city-pair markets are identical and cities are equal distance apart, the monopolist restructures its network in an attempt to minimize the competitive effect of entry. If demands vary across city pairs and distance is a factor of cost, then the restructuring of the network may be an entry deterring strategy. The incorporation of distance not only influences the number of direct connections between city pairs but may also affect how city pairs are connected within the network.