Competition in European Aviation: Pricing Policy and Market Structure

Abstract

The purpose of this paper is to analyze the impact of liberal bilateral agreements on some European air routes in terms of price competition and market structure. I propose a model that explains firms' behaviour and shows that, after the liberalization, firms exploit their cost advantages and differentiate their products more, but market structure still depends on access to airport facilities and other ancillary services controlled by the flag carriers. These results differ from American evidence in that we find that the effect of airport presence on prices through lower costs more than offsets the effect through higher perceived quality.