TRANSPORTATION RESEARCH RECORD 1517 View metadata, citation and similar papers at core.ac.uk brought to you by CORE

provided by Research Papers in Economics North American Mergers: Strategic Response to Imperfectly Competitive s Market l Internationa

JOSEPH A. CLOUGHERTY

The wave of domestic mergers among North American during show a steady rise in the domestic market concentration from 1986 the late 1980s and the subsequent reduction in competition increased Ihe onward. The two U.S. HI measures in Figure l(b) also show a risk of higher domestic prices for airline tickets. Why then have the North steady rise in concentration from 1986 onward. The Mexican American governments allowed this consolidation to occur? Research to domestic market does not parallel that of its northern neighbors, as date has focused on these mergers as a domestic phenomenon, but they occurred in response to imperfectly competitive international aviation shown in Figure l(c). The Mexican domestic market appears to be markets as well. The North American nations and their international air- a remarkably stable duopoly with the exception of a large spike in n i d ha e b o t s profit l supranonna e Ih f o e shar s lion' e th r game d coul s line the passenger HI in 1988. This spike is indicative of deep cutbacks - inter r thei f o s cost e th g cuttin y b s market e competitiv y imperfectl e thes in operations by AeroMexico, which were in part due to a stark national carriers. Matching international routes with domestic-route net- economic recession in the country. It appears that the mergers works and establishing a global hub-and-spoke system lower the cost of in the and Canada did affect their level of domestic a e ar s merger e airlin c Domesti . service t fligh l internationa g providin d an , costs g cuttin , networks e domestic-rout t significan g meancreatin o st airline concentration in these nations. l internationa n i s profie share t increas o t s carrier l internationa g allowin His are constructed on a national basis, a somewhat crude mea- markets. Economic incentive for airline mergers is established and pro- sure of competition and concentration. Morrison and Winston (/) e indicat s l spherefinding ;politica e th f o n consideratio r fo s basi a s vide show that before deregulation there were many airlines but few that these mergers are beneficial to private interests and are also in the pair-city market competitors, yet in the late 1980s the number of public welfare. Private interest and public-welfare political rationales are fell and the number of pair-city market competi- s thi n i t bu , practice n i d an e literatur l politica n i h bot n oppositio n i n ofte case they coincide. Empirical tests support domestic airline consolidation tors increased. An average of all the domestic pair-city market His in North America as a contributing factor in competitive gains in inter- would be more appropriate, but insufficient data are available to national markets for both the nations and the airlines. arrive at one. The research focus is on North American consolida- tion, but consolidation has also been evident in Europe. British Airways, Air France, Lufthansa, and other European carriers have There was a spate of domestic mergers and acquisitions within the bought out domestic competitors. North American aviation markets in the late 1980s. In Canada six carriers consolidated into Canadian Airlines International (CAI), reducing the domestic market to an Air Canada-CAI duopoly. The United States experienced something similar as the market share of MERGER RATIONALES the eight largest U.S. airlines increased from 74 percent in 1985 to 89 percent in 1989. Mexico is unique in North America because it Why have North American governments allowed consolidation to had only two significant airlines in 1983, a situation that existed occur, when their respective domestic aviation antitrust policies are through 1992. charged with prevention of monopolies and promotion of domestic To show a fundamental change in the North American airline competition? Many writers nave looked at the rise of U.S. airline industry it would be desirable to illustrate a rise in domestic airline mergers as an effect of domestic deregulation, which can imply that market-concentration ratios over the last decade. An accepted mea- mergers in other nations are a response to their domestic deregu- sure of industry concentration and competition is the Herfindahl lation. Some researchers contend that mergers are an efficient index (HI), which represents the sum of the squares of each market response to deregulation. Morrison and Winston (I) stress the competitor's market shares. His were constructed from the Interna- increased competition in individual pair-city markets because of tional Civil Aviation Organization (ICAO) Traffic series. Two large domestic networks. Levine (2) states that economies from measures of quantity were used—number of passengers and hub-and-spoke operations significantly reduce domestic airline number of departures, resulting in two His based on the different costs. Other writers view mergers as pernicious accruals of market quantity measures. power. Borenstein (J) illustrates that the Northwest-Republic and Without change in other variables, the North American His TWA-Ozark mergers resulted in quasi-monopolies in the markets would be expected to rise throughout the last decade, indicative of to and from Minneapolis and St. Louis—the respective main hubs the mergery s that efficienc hav e th e t taketha nd placefin (4) . l FigureSinga Id (aan ) representm Ki . sTWA th d e an Cana t - Northwes f o dian domestic His for 1983-1992. The two Canadian HI measures gains due to mergers in the United States are outweighed by the market-power gains. n Souther f o y Universit , Program y Polic c Publi d an y Econom l Politica There are significant differences among the authors who focus on Caufbmi*, P.O. Box 12948, Sania Barbara, Cilif. 93107. either the efficiency or market-power implications of mergers, but Clotiglieny

1400 1200<> 1000.. 800 • 600 400- 200. 0 83 84 85 87 86 89 90 01 92 (*)

BSOO-i 5400- ————— departures HI /\ 5300 / ^ I H r passenge ————— x 5200- / v 5100- __^/^ —— -^~~'"^-- 6000- 4900- 4800- 4700. 83 84 85 86 87 88 89 90 91 92 (e) FIGURE 1 North American Herfindahl indexes, 1983-1992; the higher the HI the greater the industry concentration—the highest possible HI is 10,000, for a monopoly, (a) Canadian indexes, (b) U.S. indexes, and (c) Mexican indexes.

there is also agreement. Both groups contend that mergers are largely were a reaction to international market realities. The hypothesis is y the t no r o r whethe n o r diffe y the s a n eve n phenomeno c domesti a n ear o t s airline s it d an n natio a w allo s merger c domesti t tha e th o t d hee e littl y pa y The . deregulation o t n reactio t efficien n a e ar . markets l internationa n i s profit d an c traffi e th f o s snare r greate . behavior e airlin t affec y ma t tha w ho d an t environmen l internationa c domesti t tha e indicat d woul s hypothesi e th f o n Confirmatio Internationa- lenviron factorst ,marke no l t just domestiinternationa e c th deregulation f o n functio , a wer o eals cone ar - s merger sidered as explanation for the North American domestic airline ment and not solely due to domestic realities, as the literature now mergere th h s whic o t t exten e th s asses o t s wa m ai e Th . mergers implies. TRANSPORTATION RESEARCH RECORD 1517

T ARGUMEN L THEORETICA E TH worth of fuel and a meal, and as a result the average costs go down y densit l substantia e ar e ther , words r othe n significantly—i Economicf o e s percentag e factors—th d loa t tha n reaso s thi r fo s i t I . economies h suc e customers—ar g payin y b d occupie s seat e plan e availabl The nature e of internationaadvantag g takin f o l y aviatiowa e nOn . has changeindustry e th dr ovefo s r the lasindicator t t importan . deregulated y graduall n bee e hav s market l internationa s a e decad of these density economies is to match international flights with Despite liberal international competition conditions and airlines' domestic feeder-flights that funnel passengers onto a certain flight, - interna , capacities d an s price n ow r thei t se o t m freedo g increasin increasing the load factor for that flight and ensuring that it takes tional aviation markets do not resemble th. e conditioneconomies s y that describdensit f o e e advantag t se e hav y increasingl s airline l Internationa . competition t perfec f o e issu e th p u s bring k networ a o int s flight f o g matchin e Th s i s market l internationa o int y entr t bu , independently y capacit scope economies. Economies of scope generally refer to two goods f o e promis w sho s agreement s Skie n Ope t recen e Som . restricted being provided more efficiently by one company than two. In avia- allowing- freser e entryon f o n , but it iprovisio s e noth t n in effecwhe d t nowfoun e , ar no e r wascop sf o i ts during economie , tion e appropriat e mor s i t I . consideration r unde d perio e th , 1983-1992 ) example r fo , City k Yor w Ne o t s Angele s Lo m fro s (flight e vic to considew r Ne thes m e fro market s s(flight ae s imperfectlservic r yanothe competitiveg providin f ,o t as cos then e th - s reduce . (5) y monopol d an n competitio t perfec n betwee s fall e natur a o int s market y pair-cit different g Matchin . London) o t y Cit k Yor The Cournos t modeeconomie e th l y of wh imperfec s i h whic t , competitionreductions t , whiccos t habou emphas bring -k networ - demon o t e on d goo a s i , firms w fe a y b s adjustment y quantit s size from hub-and-spoke networks are often rightly referred to as scope strate the long-term implications of international aviation economies. It is important to realize that these scope economies competition. Tirole (6, p. 224) states that "quantity competition derive from the greater densities in an airline's flights allowed by , scale f o s choice n i n competitio s a n see e b y generall e mor n ca . routes g matchin s thu d an n functio t cos s it s determine e scal f o e choic s firm' a e wher f o y man g explainin h wit d credite e ar e scop f o s economie e Thes the conditions of price competition." How the size of an airline the hub-and-spoke networks in the deregulated U.S. environment, operatioe n affects imperativ it s i cost I . t functionaviation l s will be illustrateinternationa n i t d subsequentlyapparen o als e ar .y the t bu f o n competitio c strategi e th s model t tha k wor n bee o als s ha e Ther that international airlines take advantage of these scope economies - quan : stage e on n withi s subgame o tw f o g consistin s a s firm w fe a - car l internationa w allo d woul s reduction t cos g resultin e th e becaus tity competitioe n comeprofits—th d san firsts ; ashare t secondmarke periol d then emergeinternationa r thei se duringincreas o t s rier which there e scop is r price competitiongreate e provid .t Kreptha s s and ScheinkmaMerger . nincentive (7 e ) shotrad w c strategi that Coumor thei te modelsimprov o t f s competitiocarrier l n best approximatinternationa y b t sough e e thb el longwil s - economie term results of . this competitionprofitability l . Thioveral d s two-stagan n epositio l competitioninternationa ie s in competitiv g schedulin t firs f o e procedur ' airlines e th o t r simila s respect e som the number of international flights and afterward setting pricing policy to fill seats. Coumot models are therefore reasonably good Politics . competition n aviatio l internationa f o s model s i n competitio t imperfec f o l mode t Courno e th f o c Characteristi Political considerations arise when an airline seeks to expand its the existence of supranormal profits- prof l , profit effectivele s abovmor internationa e r e yfo an d compet beyono t h d threac ec domesti - Interna . markets e competitiv y perfectl n i d foun s profit l minima - be s merger e complet o t l approva t governmen d nee s Airline . its tional aviatioy n industr i s m characterizefro s d bconsumer y t high protec profit t tha ss on internationapolicie t antitrus lf o e caus routes (8). Market profitability is sensitive to macroeconomic fluc- consolidation. It is possible to look at theories that explain political tuations. , howevertradition t . Another cruciapublic-interes r lo characteristi- private e th c r of Coumoeithe n i g t modbein s -a n actio e th f o e shar s lion' e th s obtain r competito t lowest-cos e th t tha s i s el Those whose writings promote the private-interest tradition see - com y imperfectl n i r carrie t lowest-cos e Th . profits s it d an t marke e pressur e th d an y societ n i s policie c publi c specifi r fo s explanation f o y majorit e th n gai d woul , therefore s market l internationa e petitiv groups within society. In contrast, the public-interest, or state- traffic and profits. Nations and their international airlines can gar- interest, tradition argues that national interest determines policy g correspondin e th d an c traffi l internationa e th f o e shar r large a r ne , nation e th f o s interest e th n i t ac s official t Governmen . formulation supranormal profits by cutting the costs of their international carri- not in the interests of a few noisy pressure groups. ers. This behavior is known as the strategic trade incentive in eco- n situatio a , nation a r fo l optima n protectio e mak n ca d an s nomic that does not occur under the normal economic prescription for free Private Interest trade (9). It is important to understand bow the costs of these inter- . reduced e b n ca s carrier l nationa r merge r fo s government y lobb s airline t tha e surpris o n s i t I - net c domesti g matchin m fro t resul t tha s economie e ar e Ther approvals when international incentives exist. The acquisition of a works to international routes, because domestic networks make greater domestic network improves the competitive international international-routt e carrierdomestic-marke l s more efficienpotentia e th n t in providinmentio o t t no g , internationaairline n a f o l n positio y densit f o e existenc e th m fro e deriv s economie e Thes . (J) e servic - gov y lobb o t s effort ' Industries . gains r market-powe r o y efficienc economiee s osinc n d a specificresearche flighn bee t or withihave m n the ar specififavo t c tha market s ;action witr fo h t ernmen every additional passenger, carriers lower their average costs (10), Schattschneider's (11) work on the depression era Smoot-Hawley The initian l coststraditio oe f providingpublic-choic aie rth servicn i s e arother ed higan h an(12) r d includStigle e e theGeorg . tariffs acquisitioe n ofprivat aircrafth whic ,y b maintenanc s proces e th e g facilitiesmodelin , k gatwor e l and takeoftheoretica e f don e hav r o l additiona e th , However . personnel , degree a o t , even d an , rights interests find it rational to lobby for public policies that favor their s dollar w fe a s i r passenge e mor e on r fo g providin f o t cos l margina ventures. The received wisdom is that these pressure groups or spe- Ctougheny 13

- protec f tarif . (i.e. n actio n a r fo t governmen a y lobb s interest l cia a o t e contribut s merger c domesti r whethe t tes o t s i k tas r majo tion, subsidies, or a merger) that is beneficial to them but not to the nation's share of international-market traffic. If governments are . large t a c publi to approve mergers for the public welfare, it is imperative that nations obtain higher international traffic shares as a result of the approvals. Public Interest The period of the analysis is 1983-1992. and the focus is the international performance of the North and the The case for public interest is stated by John Odell (13), who North American nations in the international airline markets. The - irra y polic e mak d conditiont an e marke n schang whe t tha d observe - international f o d compose s i e don e wer s test e th h whic n o t se a dat tional, governments change policy and yield to market forces. The market performance and domestic-market performance statistics. merger oe f th domesti; series c c carrierTraffi O sA C coul1 e th d m be fro consideree ar s d statistic at n efficient domestic-marke e Th responset to changFligh y b c e in internationaTraffi O ICA e th l marketm fro e s becauscom s e ostatistic ft severamarke ll ben- internationa efits of suce h mergersperformanc . e The mergerairlin n s causAmerica eh profiNort t ta increasek loo s s test fo e r homeTh . - series e Stag e th , addition n I . airlines n foreig f o e expens e th t a s airline n natio in the international pair-city markets among the 3 North American c economi d an t employmen d adde e th m fro s benefit n natio e hom nations and in the pair-city markets among the 3 nations and 18 r provide l globa r large a s a e rol s airline' s it y b d generate y activit w City-Ne o Mexic e th , example r Fo . nations n aviatio r majo r othe (14). Consumers also gain from merger efficiencies, because the York, Mexico City-Vancouver, Mexico City-London markets and introduction of a lower-cost airline creates a more competitive inter- all other international pair-city markets that begin in Mexico City nationaln markei s citie tr withothe l loweAl . r prices,included more ar es servicenation r , anothe d 0 a2 corresponde th f o y an -o t o g d an ing international-consumer surplus gain. The state must weigh these North America that have international service to any of the 20 other benefits againsr fo s t thefigure potentia l annua l s costs ofcontain reduce a dat de domestiTh . c competitionincluded o als e ar , s nation specifically . the reducemeasures l d domestic-consumecross-sectiona d an s r surplus time-serie an h d bot potentia h wit , l 1983-1992 employment reductions in the domestic industry. Nevertheless, mergers can be deemed efficient responses to the conditions in inter- national markets. s Test e Incentiv e Airlin

s airline n America h Nort y b e performanc e th t a s look t tes t firs e Th InterestsPublic and Private of Coincidence in the international markets where they compete and tests whether o t s contribute e presenc t marke c domesti f o e scop d an e scal e th The norm is for the societal and state theories i l s ofmode policd y formulatioestimate e Th l marke . n share t internationa s Scholar . practice n i d an e literatur l theoretica e th n i h bot l due o t e privat r o l (societa e stat e th n withi s interest s i t i r whethe r ove e argu INPSSHR, = P, + p,* DOMDEPS, + P,* DPMKTSHR, interest) or the state acting in the interests of the whole nation (state + P3*COMPS,, + p>LGINPSSHk or public interest) that defines public policy. It is not unusual for e desir s interest l specia n whe y polic c publi r ove e aris o t s argument y explanator o tw e ar e (her d an , variable t dependen e on s i e Ther - pol e th t tha e mad s i t counter-argumen a t bu m the r fo d goo s i t wha variables: icy is bad for society. - polit t tha n i e uniqu s i y polic n consolidatio e airlin c domesti e Th • INPSSHR, the dependent variable, is the share of revenue pas- ical support can come from both societal interests (the airlines) and sengers carried by a specific airline in an international pair-city e thes k see s Airline . officials) t (governmen s keeper t state-interes market for a particular year. The theoretical foundation laid out mergers ts o improvshare c e theitraffi t r profitsmarke l ; governmeninternationa t officialtha n s can approvexpectatio e th eo t s lead these mergert s marke o nn i th e e meritincreas s n ofA thei . r benefitsprofitability tt o societymarke l , althoughinternationa y prox e th f o s interest e th o t e respons n i t ac s Government . usual s les s i t tha share translates into an increased share of market profitability. airlines, but ar- eair no e t th capture r fo s d by thesdeparture c e interests—consolidatiodomesti f o r numbe e th s ni alsS o DOMDEP • improvee s th societas a , l welfareexpected e b . d Mansfielwoul p d (15) harelationshi se foundpositiv thaA . t wheyear t ntha n i e lin t mos s it t a s i e outcom y polic e converg s interest e stat d an l societa f o e siz e th r large e departures—th c domesti f o r numbe e th r greate l societa f o n interactio e th n o h researc e mor r fo d calle s ha e h ; robust an airline's domestic network—the better the airline can take - preemi e th r ove e debat d continue f o e plac n i e pressur e stat d an s it r greate e th e therefor d an e scop f o s economie f o e advantag d an e stat g convergin f o e instanc n A . perspective e singl a f o e nenc t marke l internationa e th f o e shar e increas d an s cost r lowe o t y abilit societal interests over aviation mergers was examined. traffic. • DPMKTSHRistheairUne'sshareofthetotaldomesticdepar- tures for that year, and a positive relationship between it and the EMPIRICAe Lairlin TESTINn a e mor Ge Th . expected e b o als d woul e variabl t dependen monopolizes a domestic market, the greater its ability to take There are two major tasks for testing the analysis of the airline advantage of the available scope economies and the greater should merger phenomenon that is proposed. Th. e firstraffic l t task is to internationa tes f o t e the shar s it e b mergers' ability to improve airlines' shares of international market d shoul k networ c domesti s airline' e singl a f o e siz e traffic—th The two explanatory variables are the crux of the argument. translate into competitive international advantages. If they do result Domestic departures proxies the size of the domestic scope a ide e th t suppor o t e evidenc e som e b d woul e ther t improvemen n i economies brought to bear on international market performance, that airlines desire and lobby for domestic mergers. The second and the share of total domestic departures shows the extent of an RECORD1517 RESEARCH TRANSPORTATION

- interna n o t effec s it d an t marke c domesti e th n i e presenc s airline' l internationa s behoove t i t tha e evidenc e positiv s give t tes s Thi tional markee t competitivenessbecaus s network c . domesti r thei f o e siz e th e increas o t s airline e inferenc l causa r bette a t ge o t d include e ar s variable l fina o Tw there are international market rewards. These tests do not negate . variables y explanator o tw t firs e th m fro c domesti g includin , mergers d behin e b y ma t tha s rationale r othe efficiency or market-power gains. However, the tests corroborate • COMPS is the number of competitors in the international pair- the hypothesis that airlines seek mergers and lobby for then- city market; it would be expected that the more competitors, the approval partly because of the international gains mergers generate. smaller an airline's share in that market. All markets for which an e wer ) 1 = S COMP e wher s (market y monopol a s possesse e airlin s advantage t cos f o s source c domesti e becaus s test e th m fro d omitte s Test e Incentiv n Natio would mean little to an airline holding a monopoly—its market . percent 0 10 e b y simpl d woul e shar The second test looks at North American nations' performance in s airline' e th , variable t dependen d lagge e th s i H LGINPSS • d an s carrier l nationa have y the e wher s market l internationa e th n i t marke y pair-cit l internationa t tha n i c traffi l internationa f o e shar compete, and it tests whether the scale and scope of domestic mar- , nations y b d grante e ar s right c traffi ] Internationa . year s previou e th ket presence contributes to international market share. The esti- so what airlines fly what markets and what their route rights i arl e inmode d mate those markets is fixed with substantial rigidity. For example, the

share of Air Canada in the Montreal to Washington, D.C., market NTTNPSSHj, = P,«HMDMDEPS, + pz*HMDPMKSHt l explanatior Ai powerfu f o ny ver a e provid d shoul 6 198 n i ! + Pj'NTCOMPS, + p^NTCOMPSH, . 1987 n i t marke s thi n i e performanc s Canada' p^LGINPSSHj+ : P^UNSTDTJM,+ , ,

+ P,.CANDDUM- + PT*MEXCDUM,, f o s effect e th t a k loo o t e possibl s i t i , LGINPSSH g insertin y B s departure t marke c domesti f o e shar e th d an s departure c domesti y explanator o tw e ar e ther d an , variable t dependen e on s i e Ther holding previous international market performance levels constant variables: f o e siz e th r large e th t tha t fac c problemati e th s mitigate s Thi (16). an airline, ae s th reflectef o e shar d s by DOMDEPnation' a s i , S andvariable t DPMKTSHRdependen e th ,, trie NTINPSSH • greater the route rights it could gamer from its government. Conse- passenger traffic in the various international pair-city markets for a quently, the airline's share in the international pair-city market it particular year. For example, if American Airlines held 20 percent flies should be a positive function of its share in the previous year. and Delta Airlines 15 percent of the -Santiago market, and there were no other U.S. competitors, the U.S. share of traffic a r large e Th . year t tha r fo t percen (NTTNPSSH5 3 e b d woul ) Resultss i o fs Airlinprofit et Incentivemarke f o se Testtak s sit r large e th , traffic f o e shar s nation' expected to be. The results of the airline incentives tests do not deviate from what • HMDMDEPS is the total number of annual domestic depar- t Leas y Ordinar e Th . 1 e Tabl n i n show e ar y the d an d expecte s wa tures by home country airlines that fly the international pair-city e ther t bu , regression e th e estimat o t d use t firs s wa d metho s Square e e expectedb d mor e th woul ; p relationshi e positiv A . market was significant serial correlation. The Maximum Likelihood Esti- domestic departures behind a nation's international competitors the r fo t correc d an l mode e th e estimat o t d use n the s wa d metho e mat better a nation can take advantage of economies of scope. These . elaborated e b l wil s result e thes f o n discussio d an , correlation l seria economies of scope translate into lower costs for a nation's airlines The regular IP is 0-46. and thtraffic e t total /marke P l is 0.73; theinternationa lattee th rf io s e indicativshar r e highe a d an of the lagged error terms being included in the model. More impor- • HMDPMKSH is the share of total domestic departures held t significan h wit s sign t correc e th e hav l al s value a bet e th , tantly l internationa r particula a n i s competitor l nationa s airline' e th y b t tha e airlin n a ; 0.000013 s i S DOMDEP r fo e valu a bet e Th . (-ratios pair-city market. A positive relationship is also expected between increased annual domestic departures by 100,000 would see an this variable and the dependent variable. The more a nation's inter- l internationa s it o t e averag n o s point e percentag 3 1. f o e increas national competitors monopolize a domestic market, the greater ; 0.175 s i R DPMKTSH r fo e valu a sharest bet e .Th marke y pair-cit e scop t wha f o e advantag e tak o t y abilit ' airlines s nation' e th an airlinf eo thae t shar increase l s nationa it e s sharth ; e of thmarket ec domestidomesti ce marketh n i e t ar b ye 10ther per s - economie s it o t e percentagaverag 5 n 1.7 o f s o e epoint increas n a e se l wil t cen international traffic should be greater as well, because of these . shares t marke y pair-cit l internationa . advantages t cos

The two explanatory variables, as in the airline incentive tests, are the crux of the argument. The first variable shows the size of the Resultn s Regressio E Inctnlive Airlin eTests—ML 1 E TABL national domestic scope economies brought to bear on international Dependens t Variablnation' a ef o = t INPSSHexten e Rth s show d secon e th d an , performance t marke Reg Rsqd =an .4t 6 marke c Total domesti Rs e q th = n i .7 3e presenc ' competitors l internationa how that affects international market performance. There are six Varinbto B Value Std Error 1 Ralki Annrnv Prob Intercept 17.8 1.38 12.9 0.000: 1 variables r othe COMB'S 0.000013 0.0000015 8.7 0.0001 DPMKTSHR 0.175 0.026 6.7 0.0001 • NTCOMPS is the number of home nation competitors in the OOMPS- •2.expecta y 4 0.20contradictor e 2 wer e -11.Ther . 0 market y o.oootpair-cit l internationa LQINPSSH 0.54 0.013 42.8 0.0001 tions for the sign of this coefficient—increasing the number of Cloughei 15 l nationa n betwee n competitio e induc d coul s competitor l nationa - under d an t spli e ar s economie c domesti e mor e th , market y pair-cit n foreig r ove s advantage d an s reduction t cos o t d lea d an s carrier - des r carrie e multipl f o y polic . U.S e th n o y badl s reflect s Thi . used s economie e scop c domesti e th t spli o als d coul t bu , competitors a s a e shar s it f o a are e th n i t leas t a , routes l internationa n i n ignatio . traffic l internationa f o e shar s nation' a g reducin y thereb , available nation, if not in the area of competitive equilibrium in the interna- • NTCOMPSy b d H is the homcounterbalance e ear s nation sharimplication e e of competitorthes , sHowever . in the market l tiona international pair-city market. Clearly, if Mexico had two home the fourth variable, NTCOMPSH, which has a beta value of 0.5. carriers n i competin s carrier ge th i nf o the e Acapulco-Sashar s nation' a r n Dieglarge e oth t marketha s t andsuggest the e valu t Tha have a have o t d expecte e b d woul o Mexic n the , one y onl s State d Unite a market the larger its share of traffic will be. Adding a second or greater shar- etraf os f the trafficnation' a e , allreduc othey ma r t variablemarke l s being equalinternationa .n a o t r carrie d thir - interna e th , variable t dependen d lagge e th s i H LGINPSS • fie share as demonstrated by the value for NTCOMPS, but it is also - pair l internationa t tha n i n natio t subjec e th y b e shar c traffi l tiona likely that it would increase a nation's share of the carriers in the city market for the previous year. Again, it is expected that the market, which increases a nation's market share, as demonstrated y rigidl e b d woul s carrier r thei r fo d acquire e hav s nation s right by the value for NTCOMPSH. Adding a carrier would also fixed; byf o insertin h bot , g this variablHMDPMKSH e d it an is S possible to looHMDMDEP r k fo a t s the effectvalue e th s e increas - mar l internationa s previou g holdin , variables y explanator r othe f o which positively effect the value for NTINPSSH. The advisability e rout e acquir s nation t Tha (16). t constan s level e performanc t ke of multiple-carrier-designatipn policy depends in part on the costs y thereb s i d revise y rarel e ar t tha s negotiation l bilatera n i s right and benefits as represented by these variables, which seems to indi- l internationa e th n i e shar s airline' n a , Consequently . mitigated cate that the benefits of multiple carrier designation outweigh the pair-city market it flies should be a positive function of its share costs. for the previous year. The fifth variable, LGINPSSH, is significant and positive as • UNSTDUM, CANDDUM, and MEXCDUM are dummy vari- expected, as are the country dummy variables. The country dummy ables forf tho e threvalu ea nationbet a h s studiedwit , ,States and d areUnite e includeth t tha d w to controsho o t m l fosee rs variable e thes y b d hel s advantage l structura r o g bargainin t consisten y an h wit d compare s advantage g bargainin r o l structura e som s ha , 5.9 nations i, n the marketadvantages se thethes y n faci d e internationallybehin r fa t no s i a . The regressionCanad . nations sr are neighbo s it run without intercept, to include all dummy variables. as the CANDDUM variable has a beta value of 5.5. Mexico suffers from a dummy variable beta value of 3.6 and would be expected to have a national share in its international pair-city markets of 2.3 s Test e Incentiv n Natio f o s Result - percent 9 1. d an s State d Unite e th f o t tha w belo s point e percentag age points below that of Canada, all other variables being equal. The model estimates again meet all expectations, the f-ratios are all These results make intuitive sense when the relative bargaining e Th . 2 e Tabl n i n show s a 4 0.9 s i 2 R r regula e th d an , significant power these nations have when dealing with other nations to secure regression results were again arrived at using the MLE method to traffic rights is considered. correct for OLe Sth e serial correlatioincreas o t n nnatio a problems s . behoove Tht i t e firstha s t variablesuggest e , evidenc e Th HMDMDEPS- air l , has a betinternationa a s valuit f o es of 0.000000027operation c , meanindomesti e th f go thae t ascop n d an e siz increase in home nation airline domestic departures of 100 million lines in order to perform better in the international markets. One f o e shar o t e averag n o e increas t poin e percentag 7 2. a o t d lea d woul w.ay of bringing more domestic economies to bear in the interna- d secon e Th . nation e hom e th y b d serve s market l internationa e th tional arena is to grant additional international route rights to other variable, HMDPMKSH, has a beta value of 0.085, meaning that an home carriers. The tests show there are benefits to multiple carrier s airline r o e airlin n a y b t percen 0 1 f o e shar t marke e hom n i e increas d an , HMDPMKSH , HMDMDEPS r fo s value s a n designatio in an international pair-city market should result in an increase in NTCOMPSH should rise as a result and lead to a higher home r othe l al f i s point e percentag 5 0.8 y b e shar t marke l internationa nation share in the international markets. The benefits represented variables are constant. by NTCOMPSH are dependent on foreign nations responding by h whic , -3.8 f o e valu a bet a s ha , NTCOMPS , variable d thir e Th resisting the designation of additional carriers. There are also costs seems to indicate that the more a nation adds home competitors to in national traffic shares when additional carriers are designated as a specific international pair-city market, the smaller that nation's demonstrated by the value for NTCOMPS. l internationa n a n i s carrier e hom e mor e Th . be l wil e shar t marke o t s i s competitivenes s nation' e th e increas o t y wa r Anothe allow mergers that increase the domestic presence of the home d an S HMDMDEP s variable e Th . airlines l internationa n natio , networks c domesti f o t exten d an e siz e th t reflec H HMDPMKS s Result n Regressio E Tests—ML e Incentiv n Natio 2 E TABL . markets l internationa n i s share l nationa t affec y positivel y the d an Dependene t th Variabl n i e b en =ca NTINPSSt i t tha s H hypothesi e th e corroborat o t s seem t tes e Th Reg Rsq = .94 Total Rsq = .975 public welfare for governments to approve airline mergers, . generate s merger e thes s gain l internationa e th f o e becaus o Rati t r Erro d St e Valu B e Variabl b Pro x Appro HMDMDEPS 2.69 E-8 8.28 E-9 3.3 0.0012 HMDPMKSH 0.085 0.025 3.4 0.0006 NTCOMPS 3.8 0.532 -7.2 0.0001 CONCLUSION NTCOMPSH 0.50 0.012 43.3 0.0001 LGINPSSd H an s 0.46 economic f o s 0.01field 2e th m fro e 37.7 knowledg s 0.0001 integrate h researc e Th UNSTDUM 5.94 1.05 5.6 0.0001 CANDDUMe airlin 5.5c 0 domesti e th 1.4s 8 explain t tha s 3.7 analysi n a 0.000 o int 2e scienc l politica MEXCDUM 3.61 1.70 2.1 0.0329 merger phenomenon. 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