Congestion and Market Structure in the Airline Industry

Abstract

Empirical research on the relationship between market congestion and the market competitive level largely falsifies the positive relationship predicted by theoretical models. In this paper, I exploit the airline industry network structure and focus on the level of congestion during periods in which passengers cross-connect to their final destinations. About 70% of hub airport flights depart or land during these periods. The empirical analysis establishes a strong positive relationship. Furthermore, based on a simple theoretical model, I am able to quantify the potential time savings from eliminating congestion externalities and find that, on average, a flight can save 2 minutes of flight time at its departing airport and another 1.5 minutes at its destination airport. I also find that airlines choose to pad their schedule particularly on competitive routes, presumably to attract uninformed passengers.