THE LINKAGES AMONG MARKET STRUCTURE, MARKET CONDUCT, AND SERVICE QUALITY: ANALYSIS OF THE U.S. DOMESTIC AIRLINE INDUSTRY

As supported by the dynamic structure-conduct-performance (S-C-P) paradigm, market structure affects conduct, and conduct determines firms’ performance (Mckinsey & Company Quarterly, 2008). Several researchers have looked at the S-C-P relationship with focus on price. Boreinstein, 1990; Beutel and McBride, 1992; Kim and Singal, 1993; Morrison, 1996; Veldhuis, 2005; Peters, 2006; Zhang and Round, 2009 looked at the effect of airline mergers on fares; some others have looked at the linkage between the imposition of fees and stock values (Barone, et al., 2012), ticket prices (Henrickson & Scott, 2012; Brueckner, et al., 2015); and some examine the effects of low-cost carriers entry/threat of entry on incumbent fares (Goolsbee & Syverson, 2008; Dennis, 2007). Even though there have been many studies on the impact of mergers/introduction of ancillary fees/low-cost threat on airfares, the linkage to service quality has received very little attention. This study investigates the linkages among market structure, market conduct and service quality in the US domestic airline industry. In this dissertation, provided in three essays, I specifically answer the following three questions. 1- How do mergers and acquisitions affect service quality? 2- How does the introduction of baggage fees affect service quality? 3- How does a threat of entry or an entry of a low-cost carrier affect incumbent service quality and airfare? The first essay studies the relationship between mergers in the US domestic market and service quality, as measured through late flights, mishandled bags, involuntary boarding denials and flight cancellations. The results show that in the immediate years following a merger, service quality generally deteriorates, and that the drop in service is due simultaneously to the merger and the increased concentration of the market. Thus, recent mergers in the US, including Delta and Northwest, United and Continental, Southwest and AirTran, have likely resulted in increased market concentration and decreased service levels. From a public policy perspective, the results point to the importance of regulators monitoring airline actions, such as mergers and acquisitions, that serve to increase the concentration of markets, and may also result in decreased service quality. The second essay examines the linkages between the implementation of baggage fees and late flights in the airline industry directly, and indirectly through passenger demand and adjustment in ticket price. Findings show that baggage fees policies result in improvements in on-time performance as assessed through late flights, directly through improvements in airport-side sorting and loading efficiencies, and indirectly through lower air travel demand. It is further shown that these relationships are contingent upon the presence of a hub airport on a route. The results have important managerial and public policy implications as baggage fees have often been cited as a driver of security queue, aircraft alley, and overhead bin congestions, and ultimately delayed flights. The findings suggest that these suppositions could be misplaced. The third essay conducts a simultaneous analysis of the effects of threat of entry and entry of Southwest on incumbent carriers’ on-time performance as well as yield, in the US Airline Industry. The results show that, on average, incumbent carriers’ yield and on-time performance decrease in both threat and entry periods; and that the drops in on-time performance and yield are partially linked to each other indirect effect. It is further shown that the effects of entry or threat of entry of Southwest on incumbent carriers depend highly on the general, long run pricing policy and on-time performance of those carriers. Further analysis shows that market concentration plays an exacerbating role; on the concentrated routes, the impacts of threat of entry and entry on on-time performance and yield are more severe. The findings of this study have important managerial and public policy implications as it provides a thorough assessment on incumbent carriers’ reactions to threat of entry and entry. The dissertation is based on the following papers: Steven et al, 2016, and Yazdi et al, 2017, and a working paper coauthored by Yazdi and Steven