Review of Industrial Organization (2006) 28:379–399 © Springer 2006
Measuring Conduct and Cost Parameters
in the Spanish Airline Market
Department of Economic Policy, University of Barcelona, Av. Diagonal 690. 08034
Barcelona, Spain. E-mail: email@example.com
Abstract. This paper examines airline competition through an empirical speciﬁcation of a
demand and pricing equation system. The system is estimated for the Spanish airline mar-
ket using a simultaneous procedure. The suitability of the Cournot assumption is tested in
a competitive scenario characterized by an asymmetric oligopoly with capacity constraints.
In addition, the degree of density economies is analyzed. Results show that Spanish air-
lines behave in a less competitive way than is implied by the Cournot solution. Finally,
some evidence on the fact that thin routes can be considered as natural monopolies is
Key words: oligopoly, air transportation, multiple equation models.
JEL Classiﬁcation: D43, L13, L93, C30.
Worldwide, the liberalization of air transport services has been considered
one of the most successful experiences in the wider process of regulatory
reform. However, there is strong agreement in the academic literature that
the beneﬁts from liberalization depend fundamentally on competition in
the air routes that link city pairs. In this context, two typical market struc-
tures have emerged in European airline markets.
On the one hand, oligopoly with a dominant ﬁrm predominates in thick
routes. There are two common features of European domestic markets
that allow testing of hypotheses about market power under one strategic
scenario. First, ﬂag carriers dominate their domestic markets. And, sec-
ond, airlines face exogenous capacity constraints from severe congestion
at the main European airports. Here it is worth mentioning that Kreps
and Scheinkman (1983) show that oligopoly competition with endoge-
nous capacity constraints is equivalent to the traditional one-stage Cournot
model. However, Deneckere and Kovenock (1992) ﬁnd that oligopoly