How does competition affect product choices? An empirical analysis of the U.S. airline industry
Time ：October 24th (Tuesday) 4:15-5:30 pm
Location：Jinhe Center Room 874
This paper studies major airlines’ choice of whether or not to outsource operations to regional airlines across routes and over time. Using panel data of the U.S. airline industry, we find significant differences on the pattern of outsourcing to regional airlines depending on whether the major airlines operate their own major fleets on the route as well. In particular, if HHI increases by 0.1, the log likelihood of a major airline choosing complete outsourcing relative to no outsourcing, goes up by 4.4%. In contrast, the log likelihood of partial outsourcing relative to no outsourcing goes down by 11 % if HHI goes by 0.1. Taking into account the ownership of regional airlines, we find that when facing more LCC competition, major airlines are more likely to rely on wholly owned subsidiaries relative to independent regional airlines. This lends support to the commonly held view that major airlines rely on regional airlines to compete with LCCs. We also investigate how major airlines adjust their prices when facing either LCC entry threat or actual entry. For both carrier-routes with no- and partial outsourcing, we find that major airlines respond in prices to the threat of or actual LCC entry. On carrier-routes with partial outsourcing, major airlines lower their prices more than routes with on outsourcing.
Dr. Long Shi is an assistant professor at Jinhe Center for Economic Research, Xi’an Jiaotong University. He graduated from the department of Economics at the University of Oklahoma in August, 2017. His research interests include industrial organization, applied econometrics and applied microeconomics, with the current focus on the U.S. airline industry.