CONCENTRATION AND CONTESTABILITY IN THE DEREGULATED UNITED STATES AIRLINE INDUSTRY

The purpose of this study is to describe changes in the airline industry since deregulation, to analyze why the U.S. airline industry today is neither competitive nor contestable and to suggest a possible concept to increase contestability in this market. The analysis of the concentration of both the entire airline industry and the individual markets (hub-airports) is crucial for the rejection or acceptance of contestability and perfect competition, and therefore constitutes an important element in this project. Chapter I provides an overview and outlines the purpose of the study. Chapter II presents background information about the Perfect Competition Theory and the Contestable Market Theory, describes the regulatory framework prior to deregulation, and explains why deregulation proponents voted for the abolishment of any regulatory activity in the U.S. airline industry. The chapter ends with a brief description of the impact on the Airline Deregulation Act of 1978 on the airline industry. Chapter III provides an overview of the domestic U.S. passenger airline industry from 1945-1994, concerning the developments of traffic, capacity and efficiency. Next, the concentration of the domestic U.S. passenger airline industry and twelve large hub-airports in the United States from 1972 to 1994 are analyzed. The results of this analysis and its effects on both the Perfect Competition Theory and the Contestable Market Theory are discussed in the conclusion. In Chapter IV, a possible competition concept is suggested that rests on the belief that the Contestable Market Theory is applicable to the airline industry if entry barriers, which impede contestability today, are abolished by temporary regulatory activities. These entry barriers are described in detail in the beginning of this chapter. The results of this study are summarized in Chapter V. An overall conclusion and suggestions for further research are presented.