Concentration, Potential Entry, And Performance In The Airl

Airline markets do not satisfy the theoretical conditions for perfect contestability, and theory does not indicate which deviations from perfect contestability significantly affect performance. Therefore, the effect of potential entry on performance in airline markets is explored empirically. The model considers the relationship between fares and structure on 867 significant nonstop city pairs in 1985. Hypothesis testing using regression indicates that structure matters, but it is unable to distinguish among 3 alternative hypotheses about the particular relationship between structure and performance. Perfect contestability is rejected by the data. Nonparametric regression trees show a similar situation. How structure matters is revealed by the regression trees to an extent not possible in regression. The most powerful market structure explanatory variables are measures of concentration that incorporate the number and size distribution of incumbents, as well as the number of potential entrants that are not significantly deterred by economies of scale or scope.