Oligopolization of Markets

Abstract

In this paper, concentration in US air transport markets is assessed by calculating the Herfindahl-Hirschman Index for domestic versus international markets separately. The findings show that industry concentration in the US domestic market fluctuates substantially, usually increasing in the years following recessions, when the number of financially weak carriers in the industry increases, and receding during periods of economic prosperity. Overall, the oligopolistic characteristics of the domestic market are stronger than in international markets, yet both markets do not show strong concentration using the US Department of Justice criteria. One explanation is that the industry has had a large number of new entrants since deregulation that have challenged the legacy carriers in the domestic market in a sustainable way. The Herfindahl-Hirschman Index for US international markets is showing signs of increased concentration among US carriers but reduced concentration among international airlines. So far as entry barriers are not overwhelming, the industry concentration is likely to fluctuate according to economic cycles and shocks. US domestic concentration indices may continue to increase, as low-cost airlines with competitive advantage grow, while legacy airlines strive to maintain position through mergers and acquisitions.

Keywords: Herfindahl-Hirschman Index, HHI, US, Air Transport, Aviation, Oligopoly, concentration, mergers, low cost airlines, legacy airlines, network carriers, M&A

JEL Classification: A1, L1, L4, L5, L8, L9