Question

In what way is measuring market concentration of the airline industry different from measuring market concentration in other industries?

Answer 1

Following paragraph is quoted from the article "MEASURING COMPETITION INTENSITY AND PRODUCT DIFFERENTIATION: EVIDENCE FROM THE AIRLINE INDUSTRY" by Mantin, Gillen and Delibasi (2006)

"Measuring competition is a central part of market assessment carried out by both anti-trust authorities and policy makers and decision makers in the private sector (such as market entry, positioning, and differentiation). Traditional methods of measuring competition are concentration ratios and Herfindahl Index (HHI) can overlook the rivalry between competing firms in that they ignore the way that firms compete with each other. For instance, firms can compete by (vertically and horizontally) differentiating their services and segmenting the demand. Understanding this differentiation can reveal the degree of competition by accounting for the way that firms compete, rather than merely capturing their respective market shares."

This difference particularly arises when considering market concentration in aviation industry as compared to other industries.

"In aviation markets, vertical differentiation between firms is often the strategic choice of an airline when determining whether to operate as a network carrier, which emphasizes service, or as a low cost carrier, which emphasizes lower fares. Such differentiation often supports the segmentation between price sensitive, leisure passengers and time sensitive and service driven business passengers. Airlines also differentiate themselves horizontally, to some degree, by scheduling their flights at different time slots throughout the day. "

Thus HHI may not be a sufficient enough indicator to comment on market concentration in aviation industry.