Identifying the regulatory effect of bilateral agreements on international aviation

The regulation of international air transport creates distinct competitive conditions on various international routes. Through its impact on market structure and on the conduct of carriers, regulation dictates the importance of actual and potential competition and individual carriers’ market power on pricing behaviour. By examining the effects of route concentration and market presence on yield across various international routes, the study identifies the impact of different regulatory regimes on performance. The study focusses on a small airline operating under two distinct regimes, one fairly restrictive, the other, relatively liberal. Under the very restrictive regime, both actual and potential competition are found to be insignificant, and instead collusion explains pricing behaviour. On the more liberal routes, both actual and potential competition are significant factors influencing pricing decisions. Additionally, in the more competitive environment, individual airlines have some degree of independent market power. The results point to the necessity of carriers maintaining or improving their market presence in competitive markets as a prerequisite for the exercise some amount of market power.