William G. Morrison

Bundling, integration and the delivered price of air travel: are low cost carriers full service competitors?

We explore the interaction between full service carriers (FSCs) and low cost carriers (LCCs) in a market for air travel, of which flying is merely one component in a bundle of services. The paper employs a locational approach to product differentiation to provide insights concerning the degree to which LCCs compete with FSCs. This approach highlights the role of airports in both geographic location relative to the travel market and as independent business entities that generate both airside and groundside revenues. A simple address model is used to illustrate conditions under which LCCs (affiliated with subsidiary airports) only constitute partial competition for FSCs. Consequently, market interactions between FSCs and LCCs can exhibit price stability and relatively low price dispersion. The model also indicates that vertical relationships between airports and airlines can be both profit enhancing and socially desirable.

Regulation, competition and network evolution in aviation

Abstract Our focus is the evolution of business strategies and network structure decisions in the commercial passenger aviation industry. The paper reviews the growth of hub-and-spoke networks as the dominant business model following deregulation in the latter part of the 20th century, followed by the emergence of value-based airlines as a global phenomenon at the end of the century. The paper highlights the link between airline business strategies and network structures, and examines the resulting competition between divergent network structure business models. In this context we discuss issues of market structure stability and the role played by competition policy.

The endowment effect and intertemporal choice: a laboratory investigation

We present a laboratory investigation of intertemporal choice (i.e., elicited discount rates) allowing for the influence of the endowment effect. Consistent with the previous literature, we hypothesize that the endowment effect in an intertemporal choice setting results in substantially higher discount rates relative to when individuals treat the resources in question as found money. Our results support this hypothesis and our experimental design provides a new protocol for conducting choice experiments wherein the endowment effect is an important determinant of behaviour.

Instincts as reflex choice: Does loss of temper have strategic value?

Abstract Human instincts are characterized as mechanisms which cause individuals to make “reflex” choices. Consequently, instincts may generate strategic value by providing a credible potential for selfless behavior. “Loss of temper” is examined as a specific reflex choice mechanism which creates a potential for irrational, costly conflicts. A game based upon biological conflict models, demonstrates how loss of temper can benefit subordinate players in asymmetric encounters with dominant opponents. Under certain conditions, instinctual temper is robust to evolutionary pressures and can be pervasive over time. When conscious of their capability for making reflex choices, individuals can rationally manipulate instinctual variables to their advantage.

Evolutionary Stability in the Investment-Opportunism-Retaliation Game

Can economically efficient outcomes be obtained and sustained in the absence of externally enforced property rights? We study the evolutionary properties of a game that exhibits two well-defined Nash equilibria: one generates an inefficient outcome while the other set generates an efficient outcome supported by the potential for retaliation. Although standard forward-looking refinements eliminate the efficient equilibrium, neither equilibrium type satisfies strict evolutionary stability criteria. However, both types of equilibrium define strategies that are neutrally stable, which makes them vulnerable to drift in dynamic environments. We conduct computer simulation experiments in which players learn adaptively via a tournament selection mechanism called sophisticated experimentation. Our simulations demonstrate that while the system spends a disproportionately high proportion of time in the inefficient equilibrium set, the efficient equilibrium is pervasive as the system drifts back and forth between the equilibrium sets, never settling on one or the other.

Economic perspectives on aviation security: A Critical Assessment

This chapter investigates economic aspects of aviation security, which we argue defines a fundamental economic problem, that of resource allocation. We review the recent history of attacks on civil aviation and the institutions that comprise global governance of aviation security. We outline economic approaches to defining and measuring output, cost efficiency and productivity and we compare the costs and the financing of aviation security across international jurisdictions. We consider the economic arguments underlying the question of who should pay for aviation security and we discuss the necessity for significant changes to the future implementation of aviation security in the decades to come.

Airline deregulation in Canada and the sustainability of competition: A Critical Assessment

In this chapter we catalogue the evolution of air policy and airline competition in Canada’s domestic, international and transborder markets. We examine how Canada’s air transport sector transitioned from being highly regulated, government-controlled and subject to public utility style regulations to one of ‘differentiated’ liberalization. Yet despite deregulation, privatization and ‘open skies’ agreements, the status quo of dominance by a small number of airlines in Canada remains. While air service agreements have led to market growth in some dimensions the evidence is that airline market power has not been eroded. In particular Air Canada, once a government-created monopoly, continues to dominate as part of the Star Alliance. We discuss what a new air policy might look like for Canada and the balance between consumer welfare and wider economic benefits to aviation-dependent sectors versus policy that seems focused on the economic well-being of a small number of private airlines.

Product bundling and shared information goods: A pricing exercise

Abstract In this article, the author describes an exercise in which two pricing problems (product bundling and the sharing of digital information goods) can be understood using the same analytical approach. The exercise allows students to calculate the correct numerical answers with relative ease, while the teaching plan demonstrates the importance of the distribution of reservation prices across consumers in determining the optimal pricing strategies.