An Empirical Analysis of Inter-firm Rivalry between Japanese Full-Service and Low-Cost Carriers

This paper empirically analyzes dynamic change in inter-firm rivalry betwee Japanese low-cost carriers (hereafter, LCCs) and full-service carriers (hereafter, FSCs), by estimating each carrier' s conduct parameters, and it deduces the dynamic change in consumer surplus after an LCC enters a market by estimating structural demand and airfare equations using unbalanced carrier-specific panel data of two to four carriers on nine routes for four to eight years (130 samples). Our findings are that (1) the conduct parameters of LCCs and reacting FSCs were extraordinarily low during that period, such that the Federal Trade Commission of Japan (FTCJ) was about to intervene; (2) the conduct parameters were restored to, or even exceeded, the pre-entry level in the third year of LCC entry; (3) gains in total welfare were recognized for five of the nine markets, whereas in three markets only the airline industry benefited, and in one market, total welfare decreased. On the basis of result (3), we conclude that Japanese regulatory sectors, which have allowed FSCs to engage in behavior that drives LCCs out of competitive markets while also allowing collusive code-shares between ANA and LCCs, seem to stand by the airline industry instead of consumers.