Airline Network Effects and Consumer Welfare

Review of Network Economics, pp. 1-36, November 2013

43 Pages Posted: 2 Aug 2014

See all articles by Bryan Keating

Bryan Keating

Compass Lexecon

Mark A. Israel

Compass Lexecon

Daniel L. Rubinfeld

University of California at Berkeley - School of Law; National Bureau of Economic Research (NBER); NYU Law School

Robert Willig

Princeton University - Woodrow Wilson School of Public and International Affairs

Date Written: 2013

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

Suggested Citation

Keating, Bryan and Israel, Mark A. and Rubinfeld, Daniel L. and Willig, Robert D., Airline Network Effects and Consumer Welfare (2013). Review of Network Economics, pp. 1-36, November 2013. Available at SSRN: https://ssrn.com/abstract=2473243

Bryan Keating

Compass Lexecon ( email )

1101 K Street NW
8th Floor
Washington, DC 20005
United States

Mark A. Israel

Compass Lexecon ( email )

United States

Daniel L. Rubinfeld (Contact Author)

University of California at Berkeley - School of Law ( email )

215 Boalt Hall
Berkeley, CA 94720-7200
United States
(510) 642-1959 (Phone)
(510) 642-3767 (Fax)

HOME PAGE: http://www.law.berkeley.edu/faculty/rubinfeldd

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
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NYU Law School ( email )

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New York, NY 10012-1126
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(212) 992 8834 (Phone)

Robert D. Willig

Princeton University - Woodrow Wilson School of Public and International Affairs ( email )

401 Robertson Hall
Princeton, NJ 08544-1021
United States
609-258-4843 (Phone)
609-258-5014 (Fax)

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