This paper examines the pattern of a firm’s pricing rivalry and its associated price elasticities in a set of duopoly routes. The parameters of the marginal cost function are also estimated. This model allows for free variation of estimated “conduct parameters” and price elasticities across airline routes.
A literature review suggests that increases in real fuel prices would lead to a short run reduction in both traffic and consumption, due to more careful driving and differential responses for different journeys. In the longer run the effects would be increased. It is suggested that non-dynamic estimation methods are biased, and that transport prices have wider effects, and are a more important lever of transport policy, than has sometimes been assumed.
The authors consider various concepts of demand elasticities, and several improvements in the methodology of transport demand studies are described. They also summarise the results for over sixty recent studies, and identify a number of problems along with suggested priorities for future research.
