Omer Majeed, Treasury

Title: How competition impacts prices: the Australian Aviation sector
(Omer Majeed, Robert Breunig and Adrian Domazet)

Abstract: As a small open economy with dispersed populations across a vast landmass, aviation is particularly important for Australia. Aviation is essential for transporting both goods and people, as well as transmitting ideas. While it is well documented that competition has transformed the US and European airline industries, evidence for Australia is lacking. Using comprehensive microdata, this paper is the first to examine the evolution of aviation competition in Australia and its impact on domestic airfares. We examine how the impact of competition differs depending upon the baseline level of competition and we assess the impact of competition on price growth. We find a strong link between the degree of competition and airfares across the aviation network, with increases in the number of airlines on a route resulting in significant reductions in airfares. This effect is strongest when competition is starting from a low base. Our results also show that increasing competition lowers price growth, and that the mere threat of competition can lower airfares. Overall, we show that competition has strong positive implications for passenger welfare through reducing prices.

Presenter: Omer Majeed, Commonwealth Treasury

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