Airline Hubs: Costs, Markups and the Implications of Customer Heterogeneity

43 Pages Posted: 25 Apr 1998 Last revised: 1 Oct 2010

See all articles by Steven Berry

Steven Berry

Yale University - Department of Economics; National Bureau of Economic Research (NBER); Yale University - Cowles Foundation

Pablo T. Spiller

University of California, Berkeley - Business & Public Policy Group

Michael Carnall

LECG, LLC

Date Written: May 1996

Abstract

This paper estimates a model of airline competition that captures the two major features of the industry: product differentiation and economies of density. The results not only provide support to some of the traditional common wisdom in the industry, but are also useful for understanding major puzzles concerning the evolution of the industry. The estimates indicate that a hubbing airline's ability to raise prices is focused on tickets that appeal to price-inelastic business travelers, who favor the origin-hub airline, even while paying an average premium of 20%. These high prices do not, however, provide a `monopoly umbrella' to other non-hub airlines. Finally, on the cost side there is evidence of economies of density (and therefore cost economies of hubbing) on longer routes. Consistent with the `Southwest Airlines' effect, there is no evidence of economies of density on shorter routes.

Suggested Citation

Berry, Steven T. and Spiller, Pablo T. and Carnall, Michael, Airline Hubs: Costs, Markups and the Implications of Customer Heterogeneity (May 1996). NBER Working Paper No. w5561, Available at SSRN: https://ssrn.com/abstract=4147

Steven T. Berry (Contact Author)

Yale University - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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Yale University - Cowles Foundation

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Pablo T. Spiller

University of California, Berkeley - Business & Public Policy Group ( email )

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Berkeley, CA 94720
United States
510-642-1502 (Phone)
510-642-2826 (Fax)

Michael Carnall

LECG, LLC

2000 Powell Street, Suite 600
Emeryville, CA 94608
United States

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