Airline prices on most European routes have been consistently higher than those charged for similar distances in the US. This has often been attributed to the shared monopolies created by bilateral agreements. In Discussion Paper No. 926, Research Fellow Lars-Hendrik Röller and Robin Sickles assess the potential for increased competition to induce sustainable price reductions by estimating the industry's existing pricecost margins and developing a two-stage model that differentiates international competition from domestic market niches to simulate the effect of increased competition. They find little evidence of price collusion in international markets, so this should not lead to dramatic price reductions, but significant monopoly power in domestic markets may reflect such entry barriers as hub dominance, government protection of national flag carriers or consumer loyalty.

Röller and Sickles note that European carriers also face substantially higher costs than their US competitors, so most of the benefits of liberalization are likely to arise from the elimination of cost inefficiencies and market niches. This requires managerial, structural, political and social changes which will be accomplished only slowly. This model takes no account of route-specific effects, however, and price reductions are quite likely to be more pronounced on prominent and profitable routes.

Röller and Sickles note that US experience suggests that European airlines' efficiency levels and cost structures will converge, but their apparent heterogeneity may slow this process. They call for an EU competition policy that allows mergers and strategic alliances to save costs and improve international competitiveness but which also allows competition by third parties. Such a policy towards non-EU carriers may founder, however, on account of European carriers' poor competitive position vis-à-vis their US and especially Asian counterparts.

Competition, Market Niches, and Efficiency: A Structural Model of the European Airline Industry
Lars-Hendrik Röller and Robin C Sickles

Discussion Paper No. 926, March 1994 (AM)