Some speculations and empirical evidence on the oligopolistic behaviour of competing low-cost airlines

This paper reviews the theory of cost recovery and oligopoly with a view toadvancing some judgements as to the way in which European low cost airlinesmanage yield, depending upon the market morphology that applies. It would appearthat operators offering a scheduled service to a destination not served by competitorsat either the departure airport itself, or at adjacent airports, are in a monopoly position.This is especially the case if the potential competition is limited by the costs of entryor some other barrier. In these circumstances, it is expected that the way the airlinemanages yield is to limit the prospect of new entry, but, at the same time, to generatesufficient surplus to assist in cross-subsidising any route it serves that is subject tocompetition. Routes with more than one operator in direct (at the same airport)competition or indirect (at an adjacent airport) competition will manage their yield ina manner that is traditional for their sector of the industry, but where this will beaffected by the yield management process of the competitors. This paper draws onevidence of airline price setting when they are in direct competition. It would seemthat there is evidence of price leadership and more generally of a strong correlationbetween the fares of the differentiated product that the airlines offer in competition.