Some speculations and empirical evidence on the oligopolistic behaviour of competing low-cost airlines

This paper reviews the theory of cost recovery and oligopoly with a view to advancing some judgements as to the way in which European low cost airlines manage yield, depending upon the market morphology that applies. It would appear that operators offering a scheduled service to a destination not served by competitors at either the departure airport itself, or at adjacent airports, are in a monopoly position. This is especially the case if the potential competition is limited by the costs of entry or some other barrier. In these circumstances, it is expected that the way the airline manages yield is to limit the prospect of new entry, but, at the same time, to generate sufficient surplus to assist in cross-subsidising any route it serves that is subject to competition. Routes with more than one operator in direct (at the same airport) competition or indirect (at an adjacent airport) competition will manage their yield in a manner that is traditional for their sector of the industry, but where this will be affected by the yield management process of the competitors. This paper draws on evidence of airline price setting when they are in direct competition. It would seem that there is evidence of price leadership and more generally of a strong correlation between the fares of the differentiated product that the airlines offer in competition.