Graduation Year

Fall 2010

Document Type

Campus Only Senior Thesis

Degree Name

Bachelor of Arts

Department

Economics

Reader 1

Darren Filson

Rights Information

© 2010 Riley Lewis

Abstract

In the following thesis, I give a brief history of the airline industry and its economics, describing what attributes of the industry make a hub-and-spoke system far more efficient than a point-to-point system. Next, I describe three large airline mergers in the last decade, studying whether or not they achieved their stated purpose. Finally, I discuss how hub-and-spoke systems are so much better than competing systems that they can drive weaker, less efficient systems out of the market, leading to a new equilibrium containing a small number of airlines operating from a handful of megahubs. I also use a regression of four-firm concentration ratio and average fares at four major airports to share that there is not a correlation between concentration and high prices. In fact, through increased efficiencies and the network effect, a high concentration and the presence of one or two firms at an airport, should lead to more product choice for consumers, contrary to traditional theory that states that more competition leads to better choices for consumers.

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