The impact of liberalization on market structure in the European airline industry.
The purpose of this thesis is to analyze the impact of liberalization on
market structure in the European airline industry. The following chapters focus
on three interrelated aspects: airlines' pricing behaviour and determinants of
demand, differences between European flag carriers and independent airlines in
profits and probability of entry in a route and their main determinants, and the
effect of different regulatory policies on the productivity of European carriers.
Chapter I proposes a model that explains firms' behaviour and shows that,
after the liberalization, firms exploit their cost advantages and differentiate their
products more, but market structure still depends on access to airport facilities and
other ancillary services controlled by the flag carriers. These results differ from
American evidence in that I find that the effect of airport presence on prices
through lower costs more than offsets the effect through higher perceived quality.
Chapter II develops an empirical model of entry, distinguishing between
European flag carriers which are highly regulated at the beginning of the eighties,
and independent airlines. I find that the latter enjoy sunk cost advantages but get
lower variable profits than the former. This means that possible efficiency
disadvantages suffered by the flag carriers are more than offset by their higher
perceived quality, leading to a situation in which they are less likely to enter a
route, but also less likely to exit.
Finally, chapter III specifies and estimates a production function for the airline industry, identifying firms' network characteristics and efficiency as the
main determinants of their productivity. The results show that the introduction of
liberal bilateral agreements by some European governments has given their flag
carriers incentives to start adjusting their structure in anticipation of future
liberalization in the European market while other European flag carriers have
delayed this adjustment.