The spatial effects of entry on airfares in the U.S. airline industry

Abstract

I analyze the spatial relationship between entry and airfares in the U.S. airline industry. I define the spatial relationship between adjacent airports based on catchment overlap, and evaluate the spatial impact of entry on fares. Using a fixed-effects estimator, I find that the impact of LCC entry on prices is not only larger than that of Legacy entry, but also influences prices at more distant airports. Owing to endogeneity concerns in the estimates, I also consider quasi-experimental evidence from the expiry of the Wright Amendment, which resulted in rapid and dramatic entry by Southwest Airlines from Dallas. Echoing the descriptive results, I find a broad spatial impact of entry by Southwest on rivals’ airfares. Overall, evidence suggests that current approaches to market definition in the airline industry may be overly restrictive, and I recommend researchers consider grouping a broader set of airports when defining markets.