Regulating the domestic air travel in India: an umpire's game

This paper analyses the competitive strategies available to an Indian airline in a scenario where the entry of private domestic airlines has only recently been allowed. The Calcutta-Delhi route is initially analysed as an example—where there are three major players competing. The fare charged by each airline being the same, the number of departures is used as one of the major competitive weapons. Game theory is used here as a useful tool to analyse such situations. The equilibrium behaviour of the airlines is studied and the possibility of the game being played at the focal point is then analysed.All over the world, airlines have had a long history of economic regulation of both their national and international operations with governments often regarding regulation as necessary—both to achieve a comprehensive route network and to achieve stable markets. The game formulated is then analysed from the point of view of the regulating body and it is found that the game-theoretic framework is able to provide powerful insights regarding regulatory interventions. Two types of interventions, viz. fare regulation as well as the introduction of a licence fee per flight, are analysed and their ability to shift the Nash equilibrium to the focal point are studied. Finally, the problem is generalised and some results are obtained which are applicable to any route with any number of operators as long as the basic nature of the competitive situation remains the same. Use of the game-theoretic approach as a powerful tool to decide regulatory interventions is thus highlighted.     

Sequential Estimation of Dynamic Discrete Games

This paper studies the estimation of dynamic discrete games of incomplete information. Two main econometric issues appear in the estimation of these models: the indeterminacy problem associated with the existence of multiple equilibria and the computational burden in the solution of the game. We propose a class of pseudo maximum likelihood (PML) estimators that deals with these problems, and we study the asymptotic and finite sample properties of several estimators in this class. We first focus on two‐step PML estimators, which, although they are attractive for their computational simplicity, have some important limitations: they are seriously biased in small samples; they require consistent nonparametric estimators of players' choice probabilities in the first step, which are not always available; and they are asymptotically inefficient. Second, we show that a recursive extension of the two‐step PML, which we call nested pseudo likelihood (NPL), addresses those drawbacks at a relatively small additional computational cost. The NPL estimator is particularly useful in applications where consistent nonparametric estimates of choice probabilities either are not available or are very imprecise, e.g., models with permanent unobserved heterogeneity. Finally, we illustrate these methods in Monte Carlo experiments and in an empirical application to a model of firm entry and exit in oligopoly markets using Chilean data from several retail industries.     

Revenue management games with government mandate

In 2007, the Chinese aviation authority asked the five airlines that offer service between Shanghai and Beijing to form an express shuttle alliance so that tickets from one airline could be used for any flight offered by any of the other airlines. In this paper, we study the impact of such a government mandate on the competitiveness of the market and on airline operations. First we extend a competitive airline seat allocation model to include such a government mandate and provide sufficient conditions for the existence of a pure-strategy Nash equilibrium in such a model. Both our analytical and numerical results show that fewer low-fare seats would be made available in a market with the government mandate, and furthermore, revenues of individual airlines would be lower as well. We then study a seat inventory and price competition game between duopoly airlines with the government mandate and establish the existence of pure-strategy Nash equilibriums. We show that with the government mandate, the airlines would reserve more high-fare seats and raise the prices of high-fare seats. In addition, we show that the revenues of the airlines would decrease as fewer low-fare seats are offered and increase as the prices of high-fare seats are increased. We also discuss how the government mandate should be designed so that the market could operate as efficiently as possible.     

Evaluating airline competitiveness using multiattribute decision making

This paper presents an objective approach to the evaluation of airline competitiveness. The evaluation problem is formulated as a multiattribute decision making model and solved by three widely used methods (the simple additive weighting method, the weighted product method and the technique for order preference by similarity to ideal solution) based on multiattribute value theory. A new empirical validation procedure is developed to deal with the inconsistency problem of evaluation outcomes produced by the three methods. The procedure selects the evaluation outcome which has a minimum expected value loss. An empirical study on Taiwan's five major domestic airlines is conducted to demonstrate the effectiveness of the approach. To measure and compare overall competitiveness of the airlines, five competitiveness dimensions and their associated objective performance measures on both efficiency and effectiveness are identified. The result of empirical validation for the three methods suggests the use of the simple additive weighting method. The evaluation outcome helps an airline identify its competitive advantages relative to its competitors. The objective approach presented is particularly applicable when subjective judgements on performance ratings and attribute weights are not reliable, or suitable decision makers are not available.     

An Anatomy of International Trade: Evidence From French Firms

We examine the sales of French manufacturing firms in 113 destinations, including France itself. Several regularities stand out: (i) the number of French firms selling to a market, relative to French market share, increases systematically with market size; (ii) sales distributions are similar across markets of very different size and extent of French participation; (iii) average sales in France rise systematically with selling to less popular markets and to more markets. We adopt a model of firm heterogeneity and export participation which we estimate to match moments of the French data using the method of simulated moments. The results imply that over half the variation across firms in market entry can be attributed to a single dimension of underlying firm heterogeneity: efficiency. Conditional on entry, underlying efficiency accounts for much less of the variation in sales in any given market. We use our results to simulate the effects of a 10 percent counterfactual decline in bilateral trade barriers on French firms. While total French sales rise by around $16 billion (U.S.), sales by the top decile of firms rise by nearly $23 billion (U.S.). Every lower decile experiences a drop in sales, due to selling less at home or exiting altogether.     

Disentangling the European airlines efficiency puzzle: A network data envelopment analysis approach

In recent years the European airline industry has undergone critical restructuring. It has evolved from a highly regulated market predominantly operated by national airlines to a dynamic, liberalized industry where airline firms compete freely on prices, routes, and frequencies. Although several studies have analyzed performance issues for European airlines using a variety of efficiency measurement methods, virtually none of them has considered two-stage alternatives – not only in this particular European context but in the airline industry in general. We extend the aims of previous contributions by considering a network Data Envelopment Analysis (network DEA) approach which comprises two sub-technologies that can share part of the inputs. Results show that, in general, most of the inefficiencies are generated in the first stage of the analysis. However, when considering different types of carriers several differences emerge – most of the low-cost carriers’ inefficiencies are confined to the first stage. Results also show a dynamic component, since performance differed across types of airlines during the decade 2000–2010.     

Significant Factors of Aviation Insurance and Risk Management Strategy: An Empirical Study of Taiwanese Airline Carriers

Aviation insurance premiums have become a heavy burden for the airline industry since September 11, 2001. Although the industry must constantly balance its operations between profitability and safety, the reality is that airlines are in the business of making money. Therefore, their ability to reduce cost and manage risk is a key factor for success. Unlike past research, which used subjective judgment methods, this study applied quantitative historical data (1999–2000) and gray relation analysis to identify the primary factors influencing ratemaking for aviation insurance premiums. An empirical study of six airlines in Taiwan was conducted to determine these factors and to analyze the management strategies used to deal with them. Results showed that the loss experience and performance of individual airlines were the key elements associated with aviation insurance premiums paid by each airline. By identifying and understanding the primary factors influencing ratemaking for aviation insurance, airlines will better understand their relative operational strengths and weaknesses, and further help top management identify areas for further improvement. Knowledge of these factors combined with effective risk management strategies, may result in lower premiums and operating costs for airline companies.     

On the Global Convergence of Stochastic Fictitious Play

We establish global convergence results for stochastic fictitious play for four classes of games: games with an interior ESS, zero sum games, potential games, and supermodular games. We do so by appealing to techniques from stochastic approximation theory, which relate the limit behavior of a stochastic process to the limit behavior of a differential equation defined by the expected motion of the process. The key result in our analysis of supermodular games is that the relevant differential equation defines a strongly monotone dynamical system. Our analyses of the other cases combine Lyapunov function arguments with a discrete choice theory result: that the choice probabilities generated by any additive random utility model can be derived from a deterministic model based on payoff perturbations that depend nonlinearly on the vector of choice probabilities.     

Complexity and Competition

Extensive‐form market games typically have a large number of noncompetitive equilibria. In this paper, we argue that the complexity of noncompetitive behavior provides a justification for competitive equilibrium in the sense that if rational agents have an aversion to complexity (at the margin), then maximizing behavior will result in simple behavioral rules and hence in a competitive outcome. For this purpose, we use a class of extensive‐form dynamic matching and bargaining games with a finite number of agents. In particular, we consider markets with heterogeneous buyers and sellers and deterministic, exogenous, sequential matching rules, although the results can be extended to other matching processes. If the complexity costs of implementing strategies enter players’ preferences lexicographically with the standard payoff, then every equilibrium strategy profile induces a competitive outcome.     

Determinants of strategic options in multinational market competition

This article conceptually explores the determinants of strategic options in multinational market competition. It draws on and integrates three research streams in strategy and international management: action and response in competitive rivalry; multipoint competition, and global competition and strategy. Specifically, it examines the various factors that determine whether and when a multinational corporation (MNC), while under attack from a rival MNC, will adopt the following responses: doing nothing, defending, counterattack, and total war. Those factors are organized into four categories: (1) types of attack, including price cut, introduction of new product, entry into new market, and advertising campaign; (2) awareness of interdependence of multinational markets, determined by market overlap, MNC strategy, and MNC organization; (3) motivation for globally coordinated moves, determined by the centrality of national markets, strategic importance of national markets, perceived importance of national markets, and perceived importance of rivals; and (4) feasibility of response, determined by entry barriers and diversity of national markets as well as resource heterogeneity and differential between rival MNCs. The effects of these four categories of factors on the choice of response are explored respectively. Research implications are offered in concluding remarks.     

飞行频率、拥挤成本和互补型航空联盟:中枢轮辐网络机场拥挤分析

本文在基于飞行频率、拥挤成本和互补型航空联盟的基础上系统分析了中枢轮辐网络机场拥挤问题。研究表明:航空公司的利润最大化使得航班飞行频率存在过度供给,飞机大小也是次优的,这进一步恶化了中枢机场的机场拥挤;航班飞行频率与航空公司的拥挤成本系数、旅行计划延迟效用系数正相关,与飞机每次起降的固定成本负相关;互补型航空联盟使得联盟体利润增加,航空联盟对连接市场乘客有利,对本地市场乘客不利,航空联盟还可以内化伙伴间拥挤,航班飞行频率得以优化,机场拥挤得以缓解。     

Identification and Estimation of a Discrete Game of Complete Information

We discuss the identification and estimation of discrete games of complete information. Following Bresnahan and Reiss (1990, 1991), a discrete game is a generalization of a standard discrete choice model where utility depends on the actions of other players. Using recent algorithms to compute all of the Nash equilibria to a game, we propose simulation‐based estimators for static, discrete games. We demonstrate that the model is identified under weak functional form assumptions using exclusion restrictions and an identification at infinity approach. Monte Carlo evidence demonstrates that the estimator can perform well in moderately sized samples. As an application, we study entry decisions by construction contractors to bid on highway projects in California. We find that an equilibrium is more likely to be observed if it maximizes joint profits, has a higher Nash product, uses mixed strategies, and is not Pareto dominated by another equilibrium.     

Measuring the Benefit of Offering Auxiliary Services: Do Bag‐Checkers Differ in Their Sensitivities to Airline Itinerary Attributes?

When firms evaluate their service system design choices, there is typically more uncertainty surrounding the value that a particular auxiliary service provides than there is on the cost of providing that service. To help inform this decision, we propose an approach where we compare the relative value of the segment of passengers who use an auxiliary service to the relative value of the segment that does not use it. We demonstrate this approach for a typical auxiliary service common to the airline industry. In 2008, most US airlines implemented checked baggage fee policies to decrease their costs by reducing the number of customer service agents needed in the check‐in and baggage handling processes. The success of this change has led to a current debate at many of these airlines on whether to make further staffing cuts in these areas, essentially making it even less attractive for passengers to check their baggage. Our proposed methodology helps answer whether passengers who continue to check bags in today's baggage‐fee era are more or less valuable than passengers who do not check bags. We explore this question empirically by examining, through a stated preference survey, if a history of checking or not checking bags can be used to segment passengers based on how their itinerary choices are influenced by common airline service attributes (on‐time performance, itinerary time, number of connections, airfare, and schedule delay). Contrary to the opinions of some top airline executives, we find that the passengers who continue to check bags at airlines that charge baggage fees are generally less sensitive to differences in three of these important service attributes and are less likely to switch airlines when a competing airline improves its offerings along these dimensions. Thus, airlines that charge for checked bags should consider improving the customer experience for their bag‐checking passengers, as they represent a potentially more valuable segment class to the airline.     

Measuring Inequity Aversion in a Heterogeneous Population Using Experimental Decisions and Subjective Probabilities

We combine choice data in the ultimatum game with the expectations of proposers elicited by subjective probability questions to estimate a structural model of decision making under uncertainty. The model, estimated using a large representative sample of subjects from the Dutch population, allows both nonlinear preferences for equity and expectations to vary across socioeconomic groups. Our results indicate that inequity aversion to one's own disadvantage is an increasing and concave function of the payoff difference. We also find considerable heterogeneity in the population. Young and highly educated subjects have lower aversion for inequity than other groups. Moreover, the model that uses subjective data on expectations generates much better in‐ and out‐of‐sample predictions than a model which assumes that players have rational expectations.     

Optimal Mandates and the Welfare Cost of Asymmetric Information: Evidence From the U.K. Annuity Market

Much of the extensive empirical literature on insurance markets has focused on whether adverse selection can be detected. Once detected, however, there has been little attempt to quantify its welfare cost or to assess whether and what potential government interventions may reduce these costs. To do so, we develop a model of annuity contract choice and estimate it using data from the U.K. annuity market. The model allows for private information about mortality risk as well as heterogeneity in preferences over different contract options. We focus on the choice of length of guarantee among individuals who are required to buy annuities. The results suggest that asymmetric information along the guarantee margin reduces welfare relative to a first‐best symmetric information benchmark by about £127 million per year or about 2 percent of annuitized wealth. We also find that by requiring that individuals choose the longest guarantee period allowed, mandates could achieve the first‐best allocation. However, we estimate that other mandated guarantee lengths would have detrimental effects on welfare. Since determining the optimal mandate is empirically difficult, our findings suggest that achieving welfare gains through mandatory social insurance may be harder in practice than simple theory may suggest.     

Nonparametric Welfare Analysis for Discrete Choice

We consider empirical measurement of equivalent variation (EV) and compensating variation (CV) resulting from price change of a discrete good using individual‐level data when there is unobserved heterogeneity in preferences. We show that for binary and unordered multinomial choice, the marginal distributions of EV and CV can be expressed as simple closed‐form functionals of conditional choice probabilities under essentially unrestricted preference distributions. These results hold even when the distribution and dimension of unobserved heterogeneity are neither known nor identified, and utilities are neither quasilinear nor parametrically specified. The welfare distributions take simple forms that are easy to compute in applications. In particular, average EV for a price rise equals the change in average Marshallian consumer surplus and is smaller than average CV for a normal good. These nonparametric point‐identification results fail for ordered choice if the unit price is identical for all alternatives, thereby providing a connection to Hausman–Newey's (2014) partial identification results for the limiting case of continuous choice.     

The limits of price leadership: needs-based positioning strategy and the long-term competitiveness of Europe’s low fare airlines

This article argues that a strategy of low operating costs and cheap prices is not sufficient in and of itself to establish long term competitive advantage for a growing company. Companies also need to leverage their distinctive corporate capabilities and unique experiences. In the case of service sector companies such as airlines, capabilities derive from the relationship which exists between the company, its employees, and its customers, as well as the reputation which is gradually established on the basis of reliability and quality of service. Unique experiences arise from the corporate culture and route network which an airline builds over time.     

A Dynamic Model of Demand for Houses and Neighborhoods

This paper develops a dynamic model of neighborhood choice along with a computationally light multi‐step estimator. The proposed empirical framework captures observed and unobserved preference heterogeneity across households and locations in a flexible way. We estimate the model using a newly assembled data set that matches demographic information from mortgage applications to the universe of housing transactions in the San Francisco Bay Area from 1994 to 2004. The results provide the first estimates of the marginal willingness to pay for several non‐marketed amenities—neighborhood air pollution, violent crime, and racial composition—in a dynamic framework. Comparing these estimates with those from a static version of the model highlights several important biases that arise when dynamic considerations are ignored.     

Operations research in the management of the airlines

This paper is intended to present an introduction to the use of operations research in the international airline industry, and to demonstrate the scope and significance of the airline OR activities. First, the special reasons for the viability and spread of airline OR are discussed. Then a functional framework for an airline is outlined, to be used in analyzing the problems of an airline and relating the OR work to it. Four major applications are described, corresponding to four major components of the framework. These applications are: schedule development, overbooking control, crew scheduling and engine management, respectively. In each case we describe the problem and its significance, indicate the types of solution techniques which have been developed, and assess the implemented solutions. The paper concludes with comments on the current state-of-the-art and the future of airline OR. A detailed bibliography is given.Both of the authors have been operations research directors in major airlines and more recently have focused their attention upon the industry as academic researchers. This background has provided us with an unusual opportunity to analyze the role of OR in the airlines, and our paper seeks to share with the reader some of the insights we have gained thereby.