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, 9.7% (18.3%) 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 average delay, 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; however, we interpret our results as evidence of deleterious impact of federal regulation, which continues to hamper airports' ability to finance expansion of their facilities and has been heavily influenced by large air carriers.

Number of Pages in PDF File: 52

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

JEL Classification: C14, L50, L13, L93

working papers series