Time effect of low-cost carrier entry and social welfare in US large air markets

In this study we empirically analyzed the airfare level at which most low-cost carriers (LCCs) entered the market, what impacts LCCs had on the airfares of incumbent carriers, whether the impacts differed depending on how many LCCs existed in a market and on whether LCC(s) entered a full-service carrier (FSC)’s hub airport or an adjacent airport, whether the low-airfare impact continued for the years following entry, and finally what are the welfare implication of LCCs’ entries. We modeled and estimated the simultaneous demand and price (pseudo-supply) equation to derive these four economic impacts of LCCs’ entries by using published data of 1998. Our main findings are that the impact of LCCs’ entries did not differ between the entry year and the second year and the social welfare gains are substantial, and 90% of welfare gains come from the gain in consumers surplus.