Frequency competition and environmental costs: An application to European air transport liberalization

In this paper, we analyze symmetric frequency equilibria in airline markets; these equilibria are derived as multiproduct oligopoly solutions in a spatial competition model. Competitive equilibria are compared with a regulated equilibrium; in order to assess the welfare implications of European air transport liberalization, we compute numerical solutions using data for 21 regulated European interstate routes in 1990. We conclude that, following the introduction of competition in these markets, consumer welfare is significantly higher due to frequency increases and fare decreases. Profits decrease and, as a result of higher departure frequencies, environmental costs increase. However, the gains in consumer welfare more than compensate the decrease in profits and the rise in environmental costs.