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Title:Three essays on demand and cost in the United States domestic airline industry
Author(s):Carnall, Michael Allen
Doctoral Committee Chair(s):Greenstein, Shane M.
Department / Program:Economics
Degree Granting Institution:University of Illinois at Urbana-Champaign
Subject(s):Economics, Commerce-Business
Abstract:Previous research on airline demand has recognized the existence of at least two customer types, business passengers with high valuations of time and low price elasticity, and tourists having low valuations of time and high price elasticity. Attempts to differentiate between these two groups have generally been based on assumptions about the range of fares paid by each group or the classification of specific routes into "tourist" and "business".
This research uses a differentiated products supply-and-demand model to disentangle the separate effects of hubs on costs and markups. On the demand side, it attempts to capture the fact that airline customers are heterogeneous by allowing customers' preferences over various product specifications to be drawn from a binary distribution. On the cost side, it estimates a very flexible spoke marginal cost function, so as to allow economies of density to vary across different ranges. Demand is estimated in a nested logit framework using unaggregated data from up to 200,000 products from as many as 18,000 markets per quarter. Markups, and thus marginal costs, are obtained on the basis of the assumption that firms price products to maximize profit in each market. Marginal cost is then estimated as a cubic function of leg distance and density.
The model is first applied to data for a single quarter to gain an understanding the nature of the advantages enjoyed by carriers at their hub airports. It is then independently applied to data for the fourth quarters of nine consecutive years in order to elucidate the changes which may have occurred to costs and demands as firms reconfigured their fleets and learned the art of "yield management". Finally, adapted to the analysis of pooled time series data, the model is applied to the fourth quarters of the years 1989 through 1993 in order to determine the affect on demand and cost of the several bankruptcies which occurred during that period.
Issue Date:1996
Rights Information:Copyright 1996 Carnall, Michael Allen
Date Available in IDEALS:2011-05-07
Identifier in Online Catalog:AAI9712213
OCLC Identifier:(UMI)AAI9712213

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