Evolution of the Market for Air-Travel Information

Abstract

On November 15, 2002, the Department of Transportation ("DOT") issued a Notice of Proposed Rulemaking ("NPRM") regarding the regulation of Computer Reservation Systems ("CRS") in the airline industry. The NPRM raised a critical economic question: what is the nature and extent of competition in the supply of information regarding air travel to passengers. Our report answers the DOT's question through an analysis of the characteristics of the air-travel industry in general, and suppliers of CRSs, and their competitors, in particular.

In our analysis, we discuss the major developments that have occurred in recent years in the air-travel information market, particularly the diminishing ownership interest of CRSs by airlines and the dramatic growth of the Internet as a vital and rapidly expanding information vehicle. In particular, we discuss the implications of the fact that CRSs only handle approximately one-half of total bookings. We explore how the Internet has radically altered the relationships between consumers and suppliers, and how it has become a tool for consumers to independently verify the accuracy of the information provided by CRSs, travel agents, and other providers.

We identify the relevant market for air-travel information, which includes CRSs, online travel agencies, and the websites and call centers of individual carriers. We also determine market concentration and market shares using the Herfindhal-Hirschman Index ("HHI") as outlined in the "Horizontal Merger Guidelines" issued by the Department of Justice ("DOJ") and the Federal Trade Commission ("FTC").

Based on our analysis, we offer policy recommendations regarding the appropriate regulation of independent and airline-owned CRSs. These recommendations take into account the fundamentally different economic incentives of airline-owned versus independent CRSs.

Keywords: Market Power, Market Definition, Computer Reservation Systems, Airlines

JEL Classification: D4, K2, L51, L93