A reexamination of returns to scale, density and technical progress in US airlines

The logic of protecting US airlines from competition was initially founded on the belief that substantial economies of scale existed in the industry and that consumers would benefit through, among other things, regulation of fares, regulation of service network, and restrictions on entry and exit from the industry. However, studies have undermined the faith in economic regulation by showing that economies of scale were minimal and competition would promote efficiency. The objective of this paper is to estimate a model of airline costs along the lines of Caves, Christensen, and Tretheway. First, we consider a modest generalization of the Symmetric Generalized McFadden cost function developed by Diewert and Wales by including network and control variables in the airline cost function. Second, we estimate the system of input demand functions instead of the cost function and, while estimating these input demand functions derived from the cost minimizing behavior of the airlines, we incorporate firm- and input-specific effects. Third, we introduce a general measure of exogenous technical progress. Fourth, the dataset is updated through 1984 and extended to include some new local service carriers. -from Author