On sources of market power in the airline industry: Panel data evidence from the US airports

• We analyze determinants of airfares in the US airline industry.
• Route-level competition is the strongest determinant of prices for large airports.
• Airport concentration–price relationship is driven by small airports.
• Consumer welfare losses from recent mergers are concentrated in few communities.

A firm can obtain market power through its dominant position on the product market, or via control of a key resource. In particular, it has been argued that airport dominance is a more important source of market power in the US airline industry than route dominance. We examine this contention by analyzing a seventeen-year panel of airport-level prices in the United States. We demonstrate that even though on average airport-level concentration appears to be the strongest source of market power, concentration on routes originating at an airport is the strongest predictor of price levels for the sub-set of large and medium hub airports. There is little evidence that either airport or route dominance significantly affect prices in the sub-sample of medium and small hub airports. There is also little evidence that an airport’s dominant carrier exerts market power beyond the level predicted by the airport or route dominance. Our results imply that consumer welfare losses due to airline consolidation can be concentrated in smaller communities, and related to changes in airport-level concentration. We provide a simple evaluation of the possible effects of two recent and one projected mergers (Delta-Northwest, United-Continental, and American-US Airways) in light of this finding, and suggest that the former consolidation event can potentially lead to non-trivial consumer welfare losses to travelers in over 30 small communities.