Airline Network-Structure Change, Consumer Welfare and Firms's Costs.
Job Market Paper
The merger wave in the last three decades and the associated dehubbing following mergers have concerned many state authorities about their potential negative effects on the people in the cities that dehubbings occurred. A dehubbing --- the situation when airlines cease operations at a hub --- creates changes in the airline network structure that can affect both firms’ costs and consumer welfare through the change in airfare as well as flight service quality. In this paper, I use a modified version of the random-coefficients discrete-choice model to evaluate the overall effects of dehubbing on consumer welfare and firms’ profits when United-Continental Airlines ceased its hub operation at Cleveland Hopkins International Airport in 2014. My findings reveal that airlines are successful in generating a considerable amount of cost savings and translating them into profits by re-organizing their network-structure. There is also suggestive evidence that airlines pass on some of the cost savings to consumers in the form of lower fares. In the short-run, however, consumer welfare still falls although the magnitude of average harm per person is small. In the longer-run, there is suggestive sign that consumer welfare increases because fares fall more and flight convenience also recovers as a result of other carriers add flights or new carriers enter markets at the dehubbing airport. Furthermore, the results show fares and consumer welfare do not always change in the opposite direction. In some markets, fares fall slightly and so does consumer welfare because of a deterioration of flight characteristics. This suggests an important implication that sorely using fares to evaluate impact on consumers may under or over estimate the effects of an event. Finally, this paper provides evidence of the existence of economies of density, and shows that airlines tend to shift traffic to less dense routes and away from routes with high density to take the most advantage of economies of density.
Mergers, Multimarket Contact, and Intensity of Competition. The Case of Delta and Northwest
This paper looks into the merger effects on service quality in the airline industry. In particular, it examines the relationship between merger, collusion through multimarket contact (MMC) and intensity of competition, and how it affects airline’s on-time performance. Using a difference-in-difference model with two sides fixed effects, I find that following the merger, service quality in term of on-time performance deteriorates. However, the negative effects fade over time. Furthermore, carriers showed sign of tacit collusion when they started to take MMC into account in making their on-time performance decision. The results are in support of the mutual forbearance hypothesis. This paper also explores several measures of MMC to take into account that some contacts may be more influential than others.
Impact of the Affordable Care Act's Dependent Coverage Extension on the Usage of Preventive Health Care Services
This paper uses the dependent coverage extension component of the Affordable Care Act (ACA) as a natural experiment to study the causal impact of health insurance provision on the consumption of preventive health care services. Using a fuzzy regression discontinuity design, the study reveals that the policy change had no significant impact on the forms of preventive care services studied. Alternative empirical analyses conducted using difference-in-differences and propensity scores show that the general findings are insensitive to the choice of econometric methodology. Since the analysis is based on the preventive health care usage of young adults affected by the policy change, it could be indicative of moral hazard behavior specific to this age group. A theoretical framework is also devised to gauge the relation between moral hazard, insurance provision, and the usage of preventive care.
Economies of Density and Competition: Evidence from the Six Dehub Cases in the U.S. Airlines Industry
Economies of traffic density are known as one of the main factors that drive the transformation from point-to-point to a hub-and-spoke configuration in the airline industry after deregulation. However, hubs operate effectively only at sufficient scale. In the past 2 decades, many airlines have made decision to close their hubs at some airports. Dehubbing can be interpreted as a type of exit, which is likely to increase rivals’ fare because of the reduction in competition. On the other hand, because of the cost complementary and network externalities characteristics of the hub-and-spoke structure, exit is also likely to increase rival’s scale, or traffic density, which could reduce costs and potentially lead to lower fares. This paper uses airlines’ decision to close six hubs as a natural experiment to provide another evidence of economies of traffic density by showing that an exogenous increase in traffic density can lead to a fall in fares. I found that routes on which competition falls show mixed effects; while routes of which traffic density rises but competition did not change (routes where the dehubbing carrier was not present before or after, but traffic density rose) show mostly fare decreases. This paper also provide an important implication that decreased airline competition need not always be welfare reducing.