ECONOMIES OF TRAFFIC DENSITY IN THE DEREGULATED AIRLINE INDUSTRY

This article estimates a structural model of competition among hub-and -spoke airlines in order to measure the strength of economies of traff ic density on individual route segments. We find that economies of den sity were strong during the sample period (fourth quarter 1985), stron ger than previous estimates by Douglas Caves, Laurits Christensen, and Michael Tretheway derived from traditional cost-function methods. We also find that the airlines' competitive behavior was far from collusi ve in the markets under study (markets requiring a connection at a hub airport). Our structural model also provides plausible estimates of d emand elasticities. We use our estimates to provide a cost-based ratio nale for the major changes in the structure of the industry following deregulation (for example, the increase in airport and industry-wide c oncentration, and the increase in competition at the city-pair market level) and to simulate the effects of a merger of airlines that share a hub.