Market Power Spillovers Across Airline Routes

Abstract

Airlines often route passengers on connecting flights through hubs. Despite the prevalence of connecting service, airline research focuses on nonstop routes. We estimate the propagation of shocks to fares on nonstop routes to fares on connecting routes that include those nonstop routes as a leg. We use seasonal variation in demand to identify and measure a positive pass-through rate across airline networks. We then study the impacts of mergers and nonstop route entry on connecting service that experienced a change in competition on one leg. Estimates of consumer surplus changes based on nonstop routes understate the impact of competitive changes, with a median understatement of 24% for recent mergers.