Barriers to Entry in the Airline Industry: A Multi-Dimensional Regression-Discontinuity Analysis of AIR-21

Abstract

We investigate the success of legislation aimed at increasing competition at highly concentrated major US airports, mainly by forcing these airports to increase the availability of scarce airport facilities to new entrants. We use a multi-dimensional regression-discontinuity approach to exploit a sharp discontinuity in the law's implementation and identify its effects. We find a statistically and economically significant decrease in fares resulting from an airport's coverage, 13.4% (20.2%) in markets with one (both) endpoint(s) covered. Approximately half of the decline in fares is driven by the entry of low-cost carriers. With the exception of a small effect on on-time performance, we find little evidence that the fare declines were accompanied by a diminished quality of service. The magnitude of price declines relative to delay increases, along with the accompanying increases in passenger volumes, suggest the legislation was welfare improving. The results also suggest operating barriers to entry have been an important impediment to new low-cost competition.

Keywords: Regression Discontinuity, Treatment Effect, Airline Industry, Barriers to Entry, Hub Premium, Airport Facilities

JEL Classification: C14, L50, L13, L93