Hubs versus Airport Dominance

We address the issue of the sources of dominant airlines' pricing power by separating the premium due to hub operations from that due to airport dominance. The presence of airports serving as hubs for two carriers enables such identification via difference-in-differences. Moving from lower to higher prices, the total pricing premium of hub operators both dominant and nondominant increases; while the share of the airport dominance premium diminishes relative to that of the hub premium. Absence of a hub premium at the lower end of the price distribution and lack of dominance premium at the higher prices suggests frequent flier programs rather than product differentiation as the likely dominant source of the hub operator's pricing power. The dominant airline's ability to charge higher fares due to either its airport market share or access to scarce airport facilities is confirmed.

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