ESSAYS ON EMPIRICAL INDUSTRIAL ORGANIZATION IN THE US AIRLINE INDUSTRY By TAK ...

237 Pages·2011·1.04 MB·English

by  Tak Wong

ESSAYS ONEMPIRICAL INDUSTRIAL ORGANIZATION
INTHE U.S.AIRLINEINDUSTRY
By
TAKKEUNGWONG
Adissertationsubmittedinpartial fulfillment of
therequirements forthe degreeof
DOCTOR OFPHILOSOPHY
WASHINGTONSTATE UNIVERSITY
TheSchool ofEconomic Sciences
MAY2012
©Copyright byTAKKEUNGWONG,2012
All Rights Reserved
©Copyright byTAKKEUNGWONG,2012
All Rights Reserved
TotheFacultyofWashingtonStateUniversity:
Themembers oftheCommitteeappointedtoexaminethedissertationof
TAKKEUNGWONGfindit satisfactoryandrecommendthat it beaccepted.
___________________________________
JillJ.McCluskey,Ph.D., Co-Chair
___________________________________
JiaYan,Ph.D.,Co-Chair
___________________________________
RonC.Mittelhammer,Ph.D.
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ACKNOWLEDGMENT
Iwouldliketoexpress mysincere appreciationtoDr.JillJ.McCluskey,Dr.Jia
Yan,andDr.RonC.Mittelhammerfortheirteaching, guidance,encouragement,
motivation, trust,andpatience.Without theirassistance, Iwouldnot be ableto
accomplish thetask ofwritingthis dissertationandreceivemyPh.D.degree. In
particular,duringthedissertationprocess,theyhavenot givenuphopeonmenor
forsakenme. Theyarewonderful teachers. Iwill learnfrom them toloveandtrust my
students andcolleagues.
Ialso want toexpress myspecial thanks toDr.V. LaneRawlins, Dr.Scott
Matulich,Dr.Trent Smith,Dr.RichardShumway, Dr.JonathanYoder,and Dr.Val
Miskinfortheirencouragement,guidance,teaching, and advice.Mygratitudeis also
extendedtoall thefaculties, students, staffs, andfriends oftheSchool ofEconomic
Sciences ofWashingtonStateUniversityfortheir teaching,friendship,and assistance
duringmyPh.D.studies.
Iam grateful toDr.Tom Whalen oftheAntitrust DivisionoftheU.S.Department
ofJusticewhohas kindlysharedhis paperwithme.His studyhas been animportant
impact onmyresearch of thedomesticairlinealliances intheU.S.airlineindustry.
Iam thankful tomyformeremployers, Mr.Martin Lee,Q.C.,S.C.,J.P.andHis
HonorJudgeMichael Yat-mingWong,forbeingmyreferencepersons inseekinghigher
educationintheUnitedStates. Theirefforts have mademydream cometrue.
Iam grateful toProfessor DavidThomas ofJ.ReubenClark LawSchool forhis
loveandfriendship.Hehas shownmehowtobecomea goodteacher as well as alawyer
withintegrity.Thelawknowledgethat Iacquired inthestudyfortheMasterof Lawat
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BYU LawSchool has strengthenedmyunderstandinginthefieldof LawandEconomics.
Without this knowledge, Iwouldnot beabletounderstandtherelationshipbetweenlaw
andeconomics, and to carryout myresearchon antitrust issues inthis dissertation.
Special thanks are given toDr.Robert Goss,Dr.SvenE.Wilson, Dr.RulonPope,
Dr.James McDonald,Dr.StevenWaters, Dr.GaryCornia, andDr.GaryBryner
(deceased) fortheir guidance,teaching,friendship,andlovewhen IstudiedMasterof
PublicPolicyat Brigham YoungUniversity. Theyhavetrainedmeinthefields of
economics and publicpolicy. Without thefoundationoftheknowledgeof economics and
publicpolicy, Iam not abletounderstandtheimportanceofpolicyimpacts onthelives
ofcitizens.This knowledgehas shapedmythinkingindoingthestudies inthis
dissertation. Iwant toexpress myspecial gratitudetoDr.GaryBryner whodiedon
March10,2010.Heis oneofmyfavoriteprofessors wholoves andcares his students so
much.Heis myexemplaronbeinga goodteacher.
Besides, Iwouldliketoexpress mydeep gratitude toBishop DarinPorter andhis
family, BrotherBryanWacker andhis family,President Eric Limburgand his family,
Brother Keslerandhis family, Dr. ByronDangerfieldandhis family, Dr.Gaylon
Campbell andhis family, Dr.ColinCampbell andhis family,and all themembers of
Terre ViewWardof The ChurchofJesus Christ of Latter-daySaints fortheirlove,
kindness,friendship,and support duringmystudies at WashingtonStateUniversity.
Iwouldalso liketotakethis opportunityto express thanks tomyfriends in Hong
Kong. Iam grateful toBrotherWai ShingChanandhis family,BrotherYin SangPeter
Poonandhis family, BrotherChuFungChanand his family,and BrotherChi MingLee
andhis familyfortheirsupport andtrust when Itookout thejourneyin2000forseeking
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furthereducationinthe UnitedStates. Myspecial thanks also gotoBrotherPo Lo Paul
Chan(deceased)andhis family,whohave given myfamilytheirvaluable friendshipand
love.
Iam grateful tomymother(FungYeeChanWong),myfather (PakChi Wong,
whodiedinmyteenage years), mybrothers (Tak KeunWongand TakHingWong),my
sisters, mymother-in-law(SapYeeShekNg),myfather-in-law(AhHei Ng),andmy
brother-in-law(Chi MingNg)fortheirunderstanding,love, andsupport.
Finally, Iwouldliketomakemyheartfelt acknowledgement tomywonderful and
beautiful wife, Lai-Ngor CatherineWong.She always makes me cheerful duringmy
doctoral study. Iam grateful forherlove,trust,andsupport.Sheis mysoul mate,best
friend,and eternal companion. Ihavereceivedmanyblessings becauseofher. Iam also
grateful tomydaughter (Qiu-Rang ElishaWong) andmyson (Michael Chong-Hua
Wong)fortheirsacrifice andpatience.NothingincludingmyPh.D.degree can
compensateforwhat theyhavesacrificed forme. Itrulylovethem.Theyaremybest
friends. Indeed,theyalways deservemygratitude, praises, andrespect.
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ESSAYS ONEMPIRICAL INDUSTRIAL ORGANIZATION
INTHE U.S.AIRLINEINDUSTRY
Abstract
byTak KeungWong,Ph.D.
WashingtonStateUniversity
May,2012
Co-Chairs: JillJ.McCluskeyandJiaYan
Domesticairlinealliances havecaught the attentionofFederal aviationregulators for
manyyears. In 1998,U.S.General AccountingOffice(GAO)publishedareport on
domesticcode-sharingalliances. Inthereport,GAOexpressedconcerns about the
potential anticompetitivepractices existingin threeproposedalliances. Althoughthe
formationofalliances wouldhavesignificant impacts ontheU.S.airlineindustry,
domesticairlinealliances drawlittleattentionfrom airlineliterature.This dissertation
examines this particularaviationbusiness arrangement.
This dissertationcontains threemanuscripts. Thefirst manuscript estimates
demandelasticities fordifferent airtravel products byusingadouble-logdemand
equation. Iutilizeaninstrumental variables (IV)approachtoaddress theendogeneity
problem. Ialso discuss a modifiedmethodologyin findinginstruments forthe
endogenous prices intheairlineindustry.Theresults suggest that theprice elasticities of
thepureonline,virtual code-sharing,andnon-allianceinterlineproducts areelastic.The
groupofthepureonlineandvirtual code-sharingproducts has higherproduct
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substitutability.This findingimplies that moresubstitutes arepresent withinthegroupof
pureonlineandvirtual code-sharingproducts.
Thesecondmanuscript estimates theoligopolypowerandmarket structure of
United-US Airways virtual code-sharemarkets. Idevelopastructural equilibrium model
andemploythree-stageleast-squares (3SLS)estimationapproachtoobtaintheresults.
Theresults suggest that themarket structureforthosecode-sharemarkets lies somewhere
between anon-cooperativeoligopolyand cartel structures. In addition, Ifindevidence
that substantial oligopolypowerexists inthosemarkets. Theresults also shedlight that
thosemarkets experience adecreasingtrendinthe demand inthosemarkets.This implies
that thenegativeimpact oftheglobal financial crisis inthefall of2008is onthedemand
ofairtravel products.
Thethirdmanuscript studies theentrypatterns of virtual code-sharingalliances.
Specially, Iexaminetheentrypatterns of United-US Airways virtual code-sharing
alliance. Iuseaprobit model toestimatethereduced-form equationfortheentry
decisions ofvirtual code-sharingalliances. Theempirical results suggest that Southwest
Airlines is not thedirect competitortovirtual code-sharingalliances.
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TABLE OFCONTENTS
Page
ACKNWLEDGEMENTS………………………………………………………….. iii
ABSTRACT………………………………………………………………………... vi
LISTOFTABLES…………………………………………………………………. xi
LISTOF FIGURES………………………………………………………………... xiii
CHAPTER 1. INTRODUCTION………………………………………………….. 1
References………………………………………………………….. 7
CHAPTER 2.ESTMATINGDEMANDELASTICITIES OFDOMESTIC 13
AIRLINEALLIANCES IN THEU.S.AIRLINE INDUSTRY………..…………..
Introduction………………………………………………………… 15
Classifications oftheAir travel products………………………….. 19
PureOnline Itinerary………………………………….......... 19
Virtual Code-sharingItinerary……………………………... 20
Traditional Code-sharing Itinerary…………………………. 20
Non-alliance Interline Itinerary…………………………….. 20
Semi -virtual Code-sharingItinerary…………………......... 21
Traditional Code-sharingType2 Itinerary………………… 21
Traditional Code-sharingType3 Itinerary………………… 22
LiteratureReview…………………………………………………... 23
Theoretical Framework ……………………………………………. 27
DataandVariables…………………………………………………. 32
ConstructionofVariables………………………………….. 35
Empirical Framework……………………………………………..... 40
EconometricStrategies…………….……………………………….. 41
Identification…………………….…………………………. 42
EconometricStrategies oftheConstructionof Instrumental 44
Variables…………………………………..………………..
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EstimationResults andDiscussion………………………………… 47
TheOverall Product………………………………………... 47
PureOnlineProduct………………………………………... 49
Virtual Code-sharingProduct………………………............ 49
Traditional Code-sharingProduct…………………….......... 50
Non-alliance InterlineProduct……………………………... 50
Conclusions………………………………………………………… 50
References………………………………………………………….. 53
CHAPTER 3.ESTMATINGOLIGOPOLYPOWER OFDOMESTIC AIRLINE 82
ALLIANCES INTHE U.S.AIRLINE INDUSTRY…………………...…………..
Introduction………………………………………………………… 84
BackgroundontheCode-sharingAgreement.................................... 87
LiteratureReview…………………………………………………... 89
Theoretical Framework ……………………………………………. 94
DataandVariableConstruction……………………………………. 99
Construction ofVariables………………………………….. 102
EstimationResults andDiscussion………………………………… 104
Conclusions………………………………………………………… 111
References………………………………………………………….. 113
CHAPTER 4.THEENTRYPATTERNS OFDOMESTIC AIRLINE 147
ALLIANCES INTHE U.S.AIRLINE INDUSTRY………………...……………..
Introduction………………………………………………………… 149
Background………………………………………………………… 152
LiteratureReview…………………………………………………... 155
AirlineEntryStudies……………………………………….. 155
DomesticAirlineAllianceStudies…………………………. 157
MajorAirlineEntryTheories………………………………. 160
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