Deregulation, competition, and performance in airline markets: An analysis of the Mexican airline industry

The Mexican airline industry has been a dynamic sector in the Mexican economy with important changes in its regulatory and competitive environment along its history. High concentration levels, collusion and price manipulation practices are some of the current problems addressed by the Mexican Federal Competition Commission after deregulation took place in Mexico. New Empirical Industrial Organization Methodology is utilized through a system of simultaneous behavioral equations with qualitative and quantitative information. The analysis provides some empirical insights on the structure of the market on which Mexican airlines operate. Data are drawn for the year of 2002 and a sample of the forty-one most important city-pair markets is studied. Goldfeld-Quandt and Haussman specification tests suggest the utilization of the econometric technique Weighted Two-Stage Least Square (W2SLS). Empirical results go against the contestability hypothesis and demonstrate that concentration plays a crucial role in the industry-pricing environment. Further, the competitive environment is highly influenced by the market power exercised by dominant carriers at each airport-pair market, fortress hub dominance and the service provided by discount-cost carriers. Since sharpest declines in fares occur in larger-haul markets rather than shorter distances, cities near the International Airport of Mexico City face higher fares than cities situated in the Northwest part of the country