Modelling Airline Competition in Passenger Air Transport Markets ? A Game-theoretic Approach



Modelling Airline Competition in Passenger Air Transport Markets ? A Game-theoretic Approach

Authors

M Gelhausen, German Aerospace Center, DE

Description

The purpose of this paper is to present a quantitative model of passenger air transport markets focussing especially on three main groups of stakeholders: Air travellers, airlines and airports.

Abstract

The purpose of this paper is to present a quantitative model of passenger air transport markets focussing especially on three main groups of stakeholders: Air travellers, airlines and airports. Air travellers? choice of air transport services is modelled by an aggregate demand function including airport and flight route choice considering product differentiation. Thus, demand for passenger air transport is not a fixed model-exogenous input parameter but is determined model-endogenously and therefore depends among other factors on the supply of flights and their various characteristics. Competitive relationships between airlines and airports are modelled within a game-theoretic framework. Here the focus lies on Cournot quantity competition and heterogeneous products. In addition, the model assumes that airlines and airports have incomplete information about the characteristics of each other (e.g. high-cost vs. low-cost airline). Individual beliefs about the nature of different competitors are adjusted by a dynamic learning process over time.

One of the central objectives of the model is to explain the dynamic developments of air transport markets and their competitive forces, i.e. temporary disequilibria and the long-run market equilibrium between air travellers, airlines and airports to which a market tends. Some interesting questions to examine include e.g. an analysis of entry deterrence strategies of incumbent carriers and market entry strategies of new carriers. In this context incomplete information plays a critical role with regard to the profitability of such strategies and thus influences market developments.

The model is of interest especially with regard to the evaluation of business strategies on the part of airlines and airports and for public institutions that wish to analyse various market scenarios and evaluate politico-economic actions.

Publisher

Association for European Transport