Modeling the effects of wage premiums on airline competition under asymmetric economies of density: A case study from Brazil

This paper investigates the effects of wage premiums on the competition between Full Service Carriers (FSC) and Low Fare Carriers (LFC) in the airline industry. The authors study the impact of changes in the labor market and the resulting effects on performance in the product market and examine the role of economies of density. The authors develop an oligopoly model of airline competition with endogenous wages and simulate increases in labor costs. The authors apply the model to the case of the most important domestic route of Brazil using airline/route-specific demand and costs data. The authors' chief contribution relies on the empirical model of asymmetric economies of density for the competing business models. The authors estimate that LFCs have higher economies of density than FSCs. With the empirical models of demand, costs and wages, the authors compute the wage-elasticities of price-cost markups. The authors find that, on account of the higher sensitivity of marginal costs to labor costs of the FSCs, their markups are more affected by wage premium increases than the markups of the LFCs. The results are attenuated by higher economies of density, but amplified by higher price-elasticities of demand and lower economic growth.

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  • English

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  • Accession Number: 01523100
  • Record Type: Publication
  • Files: TRIS
  • Created Date: Mar 24 2014 9:42AM