Dynamic effect of inter-airline rivalry on airfares and consumers' welfare: Japan' s full-service vs. new air carriers

We analyzed the dynamic changes in carriers' airfares and outputs and computed the changes in the consumers' surplus year by year after new Japanese carriers entered thriving routes and started to compete with Japanese full-service airlines (FSAs). Using unbalanced panel data of 222 route-and-carrier-specific sample observations, we found that new carriers discounted airfares significantly as soon as they entered new markets, but two early-comers, Skymark Airlines and AIRDO that had entered with very low airfares raised their price year by year.The two FSAs All Nippon Airways and Japan Airlines responded to the new entrants and lowered their airfares to a much lesser extent than new entrants did, and kept their airfare levels almost unchanged for at least four years from the first entry, although a tiny fluctuation of airfares was recognized. The consumers' surplus increased significantly in the first year of new entries but gradually reduced as new entrants raised their airfares.