The merger of United and Continental Airlines provides a great case study for understanding how oligopolistic markets work. This article focuses on the New York market, especially for long distance flights.
Its airports — Kennedy International, La Guardia and Newark — play a critical role in both domestic and international travel. Combined, they account for four of the top five domestic routes and constitute the biggest hub in the country for international flights.
“It’s the most contested market there is,” said Gail Grimmett, the senior vice president at Delta Air Lines in charge of New York. “That’s because it’s the largest revenue pool.”
The merger gives the new company a dominant position with these markets, allowing them to upgrade facilities with the promise of higher ticket prices.
All the competition for the New York market has kept air fares relatively low so far. But analysts cautioned that if an airline becomes too dominant at any one airport, there would be less pressure to keep the lid on prices. Such concerns could raise antitrust issues for United and Continental’s planned merger.
While higher ticket prices are a negative signal for antitrust regulators, there are advantages to allowing decent profits for more dominant firms. The obvious advantage here is the better facilities and service for the long distance flights. Of course, with airlines, you don’t want competition to be so severe that airlines feel pressure to reduce expenditures on maintenance and safety.
For the economics student, the real interest here is in watching how the market reacts to the new shift of power in this market.
William S. Swelbar, a research engineer at the International Center for Air Transportation at the Massachusetts Institute of Technology, said New York was a major laboratory for the alliances.
“New York is vital for each of the three alliances,” he said. “It’s a global game, and it is playing right in front of us.”