Airline Network Effects and Consumer Welfare

Abstract

We develop a methodology that quantifies from data on itinerary demand consumers' valuations of the characteristics of airline networks, and show that airline network effects are highly valued. We show that these effects are crucial for determining consumer impacts of public policies that affect airlines’ network architectures, such as treatments of airport asset allocations, mergers and alliances. For example, conventional wisdom on "hub premiums" is reversed since the consumer network benefits of hubs outweigh most nominal price effects. As another example, we find that the consumer network benefits from the Delta‐Northwest merger outweighed any traditionally‐predicted concentration impacts on nominal fares.

Keywords: network effects, airlines

JEL Classification: L41, L44