The spatial scope of airline competition

Abstract

We investigate whether alternative city- or airport pairs are viable substitutes and the extent to which they impact airline competition between the United Kingdom and continental Europe. To this end, we employ and measure airlines’ best responses in equilibrium. Using monthly airline-route seat capacity levels and two stage least-squares dummy-variables regression models, we estimate airlines’ strategic reaction to the competitors’ capacity levels, including competitors on other routes. We show that airlines’ relevant market extends beyond the airport-pair level. Strategic reactions depend on airline type, but all airline types have a similar strategic reaction towards high speed rail.