How Airline Markets Work…or Do They? Regulatory Reform in the Airline Industry

Severin Borenstein, Nancy L. Rose

Chapter in NBER book Economic Regulation and Its Reform: What Have We Learned? (2014), Nancy L. Rose, editor (p. 63 - 135)
Conference held September 9-10, 2005
Published in June 2014 by University of Chicago Press
© 2014 by the National Bureau of Economic Research

This chapter provides a detailed synthesis of the consequences of regulation and its reform for the passenger airline industry. It opens with a review of commercial passenger aviation during its first five decades, when government policy rather than market forces shaped its development and operation in almost all markets. The chapter next chronicles the movement toward US deregulation in the mid-1970s, the first salvo in what was to become a broad deregulation movement across the globe. It assesses the evidence on the myriad changes that have occurred in price structures, network and market structure, competition, and service quality in the years since the Airline Deregulation Act of 1978. While deregulation has been associated with consumer benefits, the transition path to a market-based equilibrium has been long and bumpy, and not all stakeholders have gained. The final section of the chapter analyzes a set of ongoing policy concerns, some of which have been highlighted by those calling for renewed government regulation. These include questions about the sustainability of competition and volatility of airline profits; concern about the market power of dominant airlines; and the implications of investment shortfalls in airport and air traffic infrastructure for congestion. While the transition from regulation to competition has been long and at times unpredictable, the chapter finds little reason to second-guess airline deregulation.

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This paper was revised on February 27, 2013

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This chapter first appeared as NBER working paper w13452, How Airline Markets Work...Or Do They? Regulatory Reform in the Airline Industry, Severin Borenstein, Nancy L. Rose
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