Airlines on the North Atlantic run at a loss, and increased fares would not make them profitable unless capacity were sharply reduced. That might require innovations in the type of service provided, which must be settled between governments.
This paper explores the possibility that the fortress hub is a consequence of the nature of airline hub-spoke rivalry. Entry into a competitor’s local market may reduce the entrant’s profit in his own market. As a result, there is a deterrent to entry if the negative effects are strong enough. The paper also examines the impacts of local competition on consumer surplus and total social surplus.
The search for higher utility alternatives underpins the empirical observation that longer-run demand elasticities tend to be higher than in the short run. However, there is another implication, that there will be a bias if consumer surplus is estimated by the use of a static model. This paper shows that there is a special case where using a static elasticity does not give bias.
