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Assessing the Competitive Impact of Wage Premiums in the Airline IndustryCícero Melo FilhoInstituto Tecnológico de Aeronáutica (ITA) Lucia Helena Salgado e SilvaInstitute of Applied Economic Research (IPEA) Renato C. SatoFederal University of São Paulo (Unifesp) Alessandro V. M. OliveiraInstituto Tecnológico de Aeronáutica (ITA) - Latin American Center for Transportation Economics March 11, 2013 Abstract: This paper analyzes the impact of wage premium increases on airline competition and the role of economies of density in creating competitive advantage. We develop an oligopoly model to examine the competition between Full Service Carriers (FSC) and Low Fare Carriers (LFC) and simulate increases in labor costs. We apply the model to the most important route of Brazil during the late nineties. After estimating demand, costs and wages, we compute the wage-elasticities of price-cost markups. We find that the markups of FSCs are more affected than LFCs. The results are amplified by weaker economies of density, higher price-elasticities of demand and lower economic growth.
Number of Pages in PDF File: 27 Keywords: airlines; markups; cost-price pass-through; economies of density JEL Classification: L93, L13, J3 working papers seriesDate posted: November 22, 2011 ; Last revised: March 15, 2013Suggested CitationContact Information
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