Airline Consolidation and Consumer Welfare

In our model of the deregulated airline industry, consumers care not only about price but also about service convenience, measured by system coverage and connection. We find that the service-enhancing effects of employing large-scale hub-and-spoke networks have outweighed the price-increasing effects of having a smaller number of competing national airlines. Thus, a welfare gain has accrued to consumers as a result of the more consolidated market structure. We conclude that public policymakers should exercise antitrust and bankruptcy authority in a manner which does not impede welfare-enhancing consolidations in the airline industry.