Market Conduct of the Three Busiest Airline Routes in China

Market Conduct of the Three Busest Arlne Routes n Chna Qong Zhang 1, Hangjun Yang 2* and Qang Wang 3 1 School of Internatonal Trade and Economcs, Unversty of Internatonal Busness and Economcs, Bejng, 100029, Chna, and School of Mathematcs and Computer, Anhu Normal Unversty, Wuhu, 241000, Chna. Emal: zhangqong@yahoo.cn 2 School of Internatonal Trade and Economcs, Unversty of Internatonal Busness and Economcs, Bejng, 100029, Chna. Emal: hangjunyang@gmal.com 3 School of Internatonal Trade and Economcs, Unversty of Internatonal Busness and Economcs, Bejng, 100029, Chna. Emal: qwang@ube.edu.cn * Correspondng author Abstract Ths paper studes the market conduct of the three busest routes domnated by the three largest arlnes n Chna. The competton strateges of the three largest Chnese carrers are found to be dfferent from each other. In general, the market behavor of Ar Chna s consstent wth that descrbed n the Cournot soluton. Both Chna Southern Arlnes and Chna Eastern Arlnes demonstrate compettve behavors somewhere between Bertrand and Cournot. However, the former s closer to Cournot, whereas the latter s closer to Bertrand. We fnd that the Cournot model seems consstent wth the competton between Chna Eastern Arlnes and Ar Chna. Our results suggest that Stackelberg competton develops wth Chna Eastern Arlnes as the leader and Chna Southern Arlnes as the follower. We also fnd that Chna Eastern Arlnes adopt low-prce strategy to compete for market shares. Due to ts lowest costs, Ar Chna earns the hghest profts among the three arlnes. We also fnd that the competton among the three carrers becomes more ntense over tme. Keywords: Market conduct, Conjectural varatons, Ar transport, Chnese arlne ndustry 1. Introducton Chna s the largest cvl avaton market n Asa. Owng to the rapd development of the Chnese arlne ndustry, Asa-Pacfc overtook North Amerca and became the largest global avaton market n 2009. That same year, data from the Internatonal Ar Transport Assocaton (IATA) showed that 647 mllon people n the Asa-Pacfc regon traveled by plane, surpassng the number of ar passengers n North Amerca for the frst tme. Bran Perce, the IATA chef economst, sad that more than half of the global avaton ndustry profts n 2010 came from the Asa-Pacfc regon, a phenomenon largely attrbuted to the strong growth n the Chnese market (Perce, 2011). The avaton market n Chna attracted the attenton of many nternatonal carrers, but faled to generate nterest from the academe. We am to fll ths gap through ths paper. To the best of our knowledge, ths artcle s the frst emprcal study on the market structure and compettve behavor of the Chnese arlne ndustry based on route-specfc and frm-specfc panel data. In recent years, deregulaton and consoldaton of the Chnese arlne ndustry led to the emergence of many local carrers and three major state-owned arlnes, whch are Ar Chna (CA), Chna Eastern Arlnes (MU), and Chna Southern Arlnes (CZ). These three major carrers have had a domestc market share of about 80 per cent snce 2000. By the end of 2010, the three bg carrers had a share of about 84 per cent of the total number of domestc ar passengers. The three arlnes compete 1

aganst each other and overlap one another s tradtonal base cautously. The economc data show that ther profts experenced large fluctuatons n the last several years. Debates center on the ssue of whether the competton among the Chnese arlnes s excessve, or whether the arlne ndustry s becomng too concentrated. In ths paper, we emprcally nvestgate the market structure and compettve behavor n the Chnese arlne ndustry by employng a conjectural varatons approach. We wll focus on the three busest arlne routes that lnk Bejng, Shangha, and Guangzhou. The three megactes have four of the largest hub arports n Chna, namely, Bejng Captal Internatonal Arport, Shangha Pudong Internatonal Arport, Shangha Hongqao Internatonal Arport, and Guangzhou Bayun Internatonal Arport. The routes n these three ctes are the busest n Chna, and the headquarters of the three major arlnes are located n these three ctes, namely, CA n Bejng, MU n Shangha, and CZ n Guangzhou. From the Statstcal Data on Cvl Avaton of Chna publshed by the General Admnstraton of Cvl Avaton of Chna (CAAC, 2001 2011), we fnd that the total capacty of the four arports has been accountng for around 35 per cent of all arport capacty n Chna snce 2000. The three routes lnkng Bejng, Shangha, and Guangzhou are very proftable, resultng n all arlnes wantng to operate flghts on these routes. These routes have now been dubbed as the golden routes. To some extent, competton among the arlnes on these routes s a mcrocosm of the tght competton n the entre Chnese market. The dstrbuton of arlne market power n these routes also reflects the market power n the whole market. Ths artcle estmates the market conduct parameters of the three busest Chnese arlne routes that are domnated by the three major carrers, and ams to dentfy the market strateges and compettve behavors of the three carrers. Our man fndng s that the competton strateges of Chna s three largest arlnes are dstnct from one another. In general, the market behavor of CA follows the Cournot model. The compettve behavors of both CZ and MU are between Bertrand and Cournot. However, CZ behaves closer to Cournot, whereas MU behaves closer to Bertrand. Ths fndng s dstnct from what was obtaned from the arlne lterature. A common concluson found n the lterature s that arlnes are generally engaged n Cournot competton (Brander and Zhang, 1990, 1993; Oum et al., 1993). By contrast, our results show that the competton behavors of both CA and CZ are reasonably close to the Cournot behavor, but the market behavor of MU s closer to Bertrand. We fnd that on the Shangha Guangzhou route, Stackelberg competton develops, wth MU as the leader and CZ as the follower. On the Bejng Guangzhou route, our data supportng the Cournot model seems consstent wth the competton between CZ and CA. We also fnd that MU adopts a low-prce strategy to compete wth ts rvals and to expand ts market share. By keepng the costs low, CA s able to acheve the hghest profts among the three arlnes. We further show that the competton among the three arlnes grows more ntense over tme. The New Emprcal Industral Organzaton (NEIO) provdes econometrc technques to study market conduct and market power by estmatng parameters of conduct (referred to as conjectural varatons or CV ). The estmated values of conduct parameters can contrbute to the emprcal evdence on certan market behavors, such as Cournot, Bertrand, and cartel. The CV approach has been wdely used n many felds. Iwata (1974) provdes a way to measure the numercal value of the CV, whch s then appled n the study of the Japanese flat glass ndustry. Appelbaum (1979, 1982) apples a CV approach to the U.S. crude petroleum and natural gas ndustry, as well as the rubber ndustry. Hwang and Ma (1988) also use a CV method to examne the equvalence of tarffs and quotas. Azzam and Rosenbaum (2001) apply CV to the US Portland cement ndustry. Song et al. (2004) and López de Haroa et al. (2007) use CV models to analyze agents behavor n electrcal power markets. A number of emprcal studes employ CV to nvestgate market power n the arlne ndustry. Brander and Zhang (1990), by calculatng the conduct parameters for 33 Chcago-based arlne routes for the thrd quarter of 1985, determne that the Cournot model seems more consstent wth the data than wth the Bertrand or cartel models. Brander and Zhang (1993) also examne the dynamc nteracton between Unted Arlnes and Amercan Arlnes usng a more accurate estmaton of CV. In the study by Oum et al. (1993), the values of CV ndcate that the duopolstc conduct les between Bertrand and 2

Cournot behavor, but much closer to Cournot. In the study of arport-par markets from Atlanta by Fsher and Kamerschen (2003), the conduct n most arport pars s found to be consstent wth the Cournot soluton. Fageda (2006) examnes arlne competton through the estmated values of CV usng data from 67 ar routes. The Spansh arlnes are found to behave n a less compettve way than s mpled by the Cournot soluton. Murakam (2011) nvestgates olgopolstc competton between full-servce carrers and low-cost carrers n Japan by dervng the CV. Mzutan (2011) descrbes the merger effects on the competton structure of the Japanese ar transportaton market usng conduct parameter, and provdes emprcal evdence of a leader-follower relatonshp among three carrers before the merger and an equal compettor relatonshp between two carrers after the merger. The paper s organzed as follows. Secton 2 provdes an overvew of the market power of the three bg arlnes. Secton 3 presents the emprcal model of the market structure and the man dea of the econometrc methodology. Secton 4 gves the estmaton results. Fnally, Secton 5 offers concludng remarks. 2. Overvew of Arlnes Market Power Three major state-owned arlnes n Chna have domnated the domestc avaton market for many years. The routes lnkng Bejng, Shangha, and Guangzhou are the most mportant n Chna. All the arlnes want to have flghts on these routes, as they are very proftable. However, the three major arlnes have been domnatng these routes. The average number of domestc passengers of the three major arlnes on the three routes was calculated usng quarterly data. In 2009, the market share of the three arlnes was around 80 per cent n every quarter of that year. The market share ncreased from 79.9 per cent n the fourth quarter of 2009 to 94.1 per cent n the frst quarter of 2010. Ths ncrease s not surprsng because two mergers were completed n the frst quarter of 2010. On January 28, 2010, MU completed the acquston of Shangha Arlnes. On March 22, 2010, CA held a 51 per cent stake n Shenzhen Arlnes. The market share of the three major arlnes ncreased after the two consoldatons. By mergng and restructurng, the three arlnes ncreased ther market shares to around 95 per cent durng the frst quarter of 2010 and the second quarter of 2011, as shown n Fgure 1. 1.000 0.900 0.800 0.700 0.600 0.500 0.400 0.300 0.200 0.100 0.000 0.893 0.836 0.798 0.799 0.941 0.951 0.963 0.956 0.949 0.949 2009_1 2009_2 2009_3 2009_4 2010_1 2010_2 2010_3 2010_4 2011_1 2011_2 Fgure 1: Market shares of the three major state-owned arlnes Source: http://www.carnoc.com/ (quarterly data) We now look at the data of each company. Durng the frst quarter of 2010, the percentages of connectng revenue passenger klometers (RPKs) on the three routes of CA, MU, and CZ were 30 per cent, 27 per cent, and 37 per cent, respectvely. The three companes seemed to share and control the market equally. However, a new scenaro emerged after examnng the data of each cty-par route. Table 1 shows that the Bejng Shangha route s domnated by CA and MU, the Bejng Guangzhou route s controlled by CA and CZ, and the Shangha Guangzhou route s domnated by CZ and MU. The market share of every domnant carrer s over 30 per cent on each route. Through a smple 3

calculaton, the market share of two domnant arlnes s around 90 per cent on each route. Therefore, a very hgh market concentraton on the three routes s evdent. The three major arlnes control the whole market. However, each cty-par route s characterzed by duopoly. Table 1: Percentages of connectng RPKs on the three routes Routes Carrers 2010_1 2010_2 2010_3 2010_4 2011_1 2011_2 CA 0.366 0.375 0.329 0.339 0.343 0.349 Bejng- CZ 0.026 0.023 0.025 0.026 0.027 0.023 Shangha MU 0.556 0.548 0.605 0.586 0.572 0.568 Bejng- Guangzhou Shangha- Guangzhou 3. Modelng CA 0.431 0.408 0.383 0.386 0.396 0.391 CZ 0.478 0.498 0.541 0.528 0.51 0.529 CA 0.062 0.081 0.098 0.083 0.1 0.065 CZ 0.384 0.391 0.413 0.416 0.398 0.423 MU 0.554 0.528 0.490 0.501 0.502 0.512 Source: http://www.carnoc.com/ (quarterly data) Note: MU does not operate drect flghts between Bejng and Guangzhou. The degree of market concentraton on the three bg routes s very hgh. In theory, a small number of olgopoles gan hgh profts by lmtng producton outputs to keep the prces hgh. However, n practce, we do observe that some frms adopt low prces to compete wth ther rvals. Usng a CV approach, olgopolstc competton among the three major arlnes s modeled n ths secton, wth the am of fndng out the correspondng types of competton the three arlnes have engaged n. 3.1. Conduct Parameter Assume that the three major state-owned arlnes supply a homogeneous product on the same route. Recall that on each route, only two out of the three major arlnes offer flghts. In fact, even on the same route, dfferent arlnes offer dfferent products, but drawng a dstnct dstncton among them s farly dffcult. Moreover, these arlnes are all owned by the Chnese government, wth ther stocks lsted on the stock exchange. Leadershp and staff are often transferred from one arlne to another, mplyng a slght dfference n management capabltes and servce levels among these three. Therefore, consderng the flghts provded by the three carrers on the same route as homogeneous s not unreasonable. We frst defne the conduct parameter n the duopoly case. Let q be the quantty suppled by frm, where = 1, 2. Then Q = q + q s the total output. Let p= pq ( ) be the nverse demand functon, and 1 2 C ( q ) be the total cost of frm. The proft functon of frm can be wrtten as π = pqq ( ) C ( q ). (1) Followng Brander and Zhang (1990, 1993) and Oum et al. (1993), the conduct parameter s defned as dq p MC η =., (2) dq p S where η = ( dq / dp)( p / Q) s the prce elastcty of demand, S = q / Q s the market share of frm, and MC s the margnal cost of frm. Dfferent values of dq / dq represent dfferent types of olgopolstc competton. In the duopoly case, f the two frms have the same costs, then 0, 1 and 2 4

represent Bertrand competton, Cournot competton and cartel case, respectvely. Larger values of dq / dq ndcate a more collusve conduct of frm. The conduct parameter s determned by the prce, market share, margnal cost, and prce elastcty of demand. As s defned, the conduct parameter ncreases n prce and prce elastcty, and decreases n market share and margnal cost. The prce and market share can be calculated drectly from the statstcal data; however, the margnal cost and prce elastcty of demand must be estmated. 3.2. Margnal Cost The estmated value of the route-specfc margnal cost for each carrer s obtaned usng dfferent methods. Fscher and Kamerschen (2003) and Mzutan (2011) frst estmate a translog total cost functon, and then approxmate the route-specfc margnal cost for each carrer. However, ths method cannot be appled n ths study because of some data ssue. In Chna, the average annual salary per employee and some other costs are not avalable to the publc. Another way to approxmate route specfc margnal cost for each carrer s proposed by Brander and Zhang (1990, 1993), Oum et al. (1993), and Murakam (2011). They use ths methodology to estmate the route specfc margnal cost for each carrer. They defne the per-passenger cost of arlne on route k n perod t as MC = cpm ( D / AFL t t) θ D, (3) k k where D k s the dstance of route k, AFL t s the average length flown by carrer n perod t, cpm t s the cost per passenger-mle of carrer n perod t, and θ s an unknown parameter n the cost functon that ranges from 0 to 1. Based on several studes n the arlne lterature, Brander and Zhang (1990, 1993) use θ = 0.5. Based on the data of Amercan core arports, Oum et al. (1993) statstcally estmate θ = 0.43 usng the maxmum lkelhood estmaton method. Usng the nonlnear least squares method, Murakam (2011) calculates that θ = 0.374 n the Japanese arlne ndustry. Prevous theoretcal and emprcal researche suggests that the value of θ s about 0.5, but ths value vares n dfferent countres. Below s a formal dervaton for estmatng θ. Usng Eqs. 2 and 3, we obtan { cpm ( D / AFL ) θ t t D } η p = k k. (4) η ( dq / dq ) s Eq. 4 can be transferred nto ln η + ln cpm ln D ln p (ln D ln AFL ) ln( ( dq / dq ) s t + = t ) k θ + k η. (5) Let y = lnη + ln cpmt + ln D k ln p, x = ln D k ln AFL t and c = ln( η ( dq / dq ) s ). Denote c = mean( c ), and let ε = c c. Then Eq. 5 can be rewrtten as: y = θx + c+ ε. (6) If we know the estmated value of η, we can calculate the value of θ usng ordnary least squares (OLS). In next subsecton, we explan how to estmate the elastcty of demand. 3.3. Elastcty of Demand To estmate the elastcty of demand, the demand functons are generally specfed n log-lnear or sem-logarthmc forms (Tretheway and Oum, 1992; Fsher and Kamerschen, 2003; Fageda and Fernandez-Vlladangos, 2009). Takng the log-lnear form, we specfy the followng demand functon: 5

ln( Q ) = b ηln p + αln POP + βln INC + γ ln DIST 0 k + ϕexpo + λ Sprng + λ Summer + λ Autumn, 1 2 3 where Q s the total passenger transport (passenger-km) on route k n perod t, (7) p s the average prce, POP s the total populaton of the two ctes lnked by route k, INC s the per capta ncome of the two lnked ctes, DIST s the dstance of route k, EXPO s a dummy varable, whch equals one on Shangha-based routes durng the Shangha Expo perod, and Sprng, Summer and Autumn are dummy varables for the seasons. Prce and populaton are two essental varables of a demand functon. Income per capta reflects the wealth of resdents and affects the market demand. The coeffcent of prce s expected to be negatve, whereas the coeffcents of populaton and ncome are expected to be postve. The longer the travel dstance, the more tme can be saved usng ar transport compared wth other transport modes. Hence, route dstance has postve effects on passenger demand. The Shangha Expo s a great boost for the Chnese cvl avaton ndustry; thus, the dummy varable for the exposton should be ncluded. Moreover, seasons are expected to have sgnfcant effects on passenger demand. In Chna, sprng s generally consdered as a slow season, whereas autumn s a busy season and s expected to have a postve mpact on demand. 4. Emprcal Results The sample used n the emprcal analyss ncludes observatons on the three major domestc arlnes n Chna from January 1, 2010 to June 30, 2011. The data used s a route-specfc panel data set of the three busest routes n Chna, the frequency of whch s quarterly. Informaton about the number of passengers on dfferent fare classes carred by the gven arlne on each route has been obtaned from the computer reservaton system of TravelSky Technology Lmted. The passenger demand data are restrcted to non-stop servces. The fare nformaton s obtaned from the Chnese Arfare Informaton Network (www.arts.net) and other related webstes, such as those of the three arlnes. The data on the per capta ncome and populaton of Bejng, Shangha, and Guangzhou are collected from the Natonal Bureau of Statstcs of Chna. Prce and ncome are adjusted by the retal prce ndex. The dstances of the three routes and the market shares of the arlnes n each route are obtaned from the Cvl Avaton Resource Net of Chna. Data on the man costs of carrers are obtaned from the annual reports and the quarter reports of the three arlnes. Total flght length, total number of flghts, and RPKs are collected from the webstes of the three arlnes as well as from ther annual reports. Based on these data, the average flght length and cost per passenger-km of each carrer for every season can be calculated. The route-specfc panel data of the three routes for sx quarters are used to estmate the demand Eq. 7. The computaton of the Durbn Watson statstc reveals a sgnfcant autocorrelaton n the models. The results of the Whte test and the LM test show that the heteroskedastc errors and cross-sectonal correlatons of the data are sgnfcant. Hence, the OLS estmaton s based, and the feasble generalzed least squares (FGLS) method s used to estmate the model. The estmated equaton (standard errors n parentheses) s ln( Q ) = 44.81 0.90 ln p + 5.78ln POP + 0.88ln INC + 1.76 ln DIST k (3.33) (0.43) (0.40) (0.38) (0.14) + 0.23EXPO 0.19Sprng + 0.08Summer + 0.17Autumn (0.06) (0.05) (0.02) (0.02) Note: denotes sgnfcance at the 1 per cent level 6 (8)

All the coeffcents are sgnfcant at the 1 per cent level. The prce elastcty of demand s 0.90. As expected, the ar traffc on a route s greater for cty-pars wth larger populatons and hgher ncome levels. Longer dstance and the Shangha World Expo have postve effects on passenger demand. The demand s lower durng sprng, and hgher durng summer and autumn. We wll use the estmated value of the prce elastcty of demand to estmate θ n Eq. 6. The data set for estmatng Eq. 6 s the carrer-specfc panel data on the three routes for sx quarters. The estmated values of θ and c are 0.390 and 0.198, respectvely (both are sgnfcant at the 1 per cent level). The estmated value of θ s very close to what Oum et al. (1993) and Murakam (2011) obtaned. Usng data from the quarterly reports of the three arlnes, we can calculate the costs per passenger-km of the three carrers n each quarter. As seen n Table 2, MU s cost s the hghest, and CA s cost s the lowest. Table 2: Cost per passenger-km of the three arlnes (n RMB) CA CZ MU 2010_q1 0.511 0.540 0.626 2010_q2 0.555 0.556 0.664 2010_q3 0.524 0.539 0.612 2010_q4 0.564 0.614 0.709 2011_q1 0.561 0.580 0.636 2011_q2 0.574 0.632 0.701 Usng Eq. 3, the route-specfc margnal cost for each carrer can be estmated. The carrerspecfc panel data on three routes for sx quarters wll be used to estmate the conduct parameters. Usng Eq. 2, the conduct parameters of arlnes domnant on each route are shown n Table 3. Table 3: The conduct parameters of domnant arlnes on each route Routes Carrers 2010_1 2010_2 2010_3 2010_4 2011_1 2011_2 Bejng-Shangha CA 1.001 1.057 1.262 1.044 0.905 0.915 MU 0.436 0.559 0.571 0.383 0.450 0.410 Bejng-Guangzhou CA 0.851 0.844 0.938 0.895 0.766 0.786 CZ 0.528 0.611 0.623 0.502 0.561 0.428 Shangha-Guangzhou CZ 0.666 0.896 0.880 0.600 0.551 0.491 MU 0.328 0.441 0.586 0.170 0.149 0.142 All the values n Table 3 are between 0 and 2. However, some values are close to 1 (Cournot behavor), whle some are close to 0 (Bertrand behavor). Whether the three arlnes follow Cournot or Bertrand behavor s unclear. Further analyses are necessary to study the compettve strateges of the three bg carrers based on the estmated parameter values. Frst, the conduct parameters of CA are around 1 n every quarter on each route. Hence, the compettve behavors of CA are reasonably close to Cournot behavor. Moreover, the conduct parameters of CA are hgher than those of the other two arlnes on every route n every quarter. Table 2 shows that CA s margnal cost s the lowest among the three bg arlnes. Recall that everythng else beng equal, conduct parameters decrease n margnal costs, whch partly explans why CA has hgher conduct parameters. The annual reports of the three carrers reveal that CA earns huge profts. In 2010, the net proft of CA was over ten bllon RMB for the frst tme, and was around half of the total profts of the three arlnes. On the three routes studed, the proft of CA, whch s above 40 per cent 7

of the total profts of the three carrers, s also the hghest. We may conclude that CA obtans supernormal profts by controllng costs to compete aganst ts compettors. Second, the conduct parameters of CZ are between 0.428 and 0.896, and the average s above 0.6. The compettve behavor of CZ s between Bertrand and Cournot behavor, but s closer to Cournot. To analyze specfc CZ competton strateges, the correlaton coeffcents of the conduct parameters among the three arlnes operatng on the same route are calculated. The correlaton coeffcent between the conduct parameters of MU and CZ s 0.945 on the Shangha Guangzhou route, and s statstcally sgnfcant at the 1 per cent level. The result ndcates that MU and CZ have smlar compettve behavors on the route. However, on the same route, the conduct parameter of CZ s larger than that of MU n every quarter, and all of the dfferences are about 0.4. As shown n Table 1, the market share of MU s much larger than that of CZ on the Shangha Guangzhou route, mplyng that Stackelberg competton develops, wth MU as a leader and CZ as a follower. The correlaton coeffcent between the conduct parameters of CZ and CA s 0.450 on the Bejng Guangzhou route, and t s not statstcally sgnfcant. A colludng behavor between the two arlnes s not proven. Note that all the conduct parameters of CZ and CA are close to 1 on the Bejng Guangzhou route, ndcatng that the Cournot soluton s consstent wth the data. Thrd, the conduct parameters of MU are between 0.142 and 0.586, and the average s only 0.385. We may conclude that the market behavor of MU les between Bertrand and Cournot behavor, but s actually closer to Bertrand. The correlaton coeffcent between the conduct parameters of MU and ts prces s postve and statstcally sgnfcant. From the data set, we can observe that the prces of MU are clearly lower than those of ts compettors. As clearly shown n Table 2, the costs of MU are the hghest among the three major carrers. Table 1 also shows that the market share of MU s much hgher than that of ts man compettors. These results mply that MU adopts a low-prce strategy to compete wth ts compettors and to expand ts market share. Ths behavor s consstent to what the Bertrand model predcts, and can be partally explaned by vertcal product dfferentaton. MU s safety record and overall servce qualty s the worst among the three arlnes. On November 21, 2004, MU5210 crashed nto a park shortly after t took off from the ground. Ths accdent s the latest fatal plane crash among the three carrers, whch sgnfcantly affects consumer confdence n the safety of MU. Moreover, beng the last one among the three carrers to jon a global arlne allance, MU dd not jon SkyTeam untl June 21, 2011, whch affected ts convenence and network connectvty. Therefore, MU has to lower ts fares to attract passengers. Fnally, the tme trend of conduct parameters s studed. We frst analyze conduct parameters on dfferent quarters usng the pared samples t-test. All the values are larger than 2, whch suggest obvous gaps between the conduct parameters. In other words, the three arlnes make apparent changes n ther compettve behavors because of off-peak season effects and tme trend. The fact that conduct parameters n the peak seasons are hgher than those n the off-peak seasons s sgnfcant, as t ndcates a decrease n the competton among the three carrers durng peak seasons. Second, we consder a lnear tme trend model for conduct parameters on each route: CP = at + b 1 D 1 + b 2 D 2 + c, where CP s conduct parameters, T s a tme trend varable wth values from 1 to 6, D s a dummy 1 varable for the arlne, and D s a dummy varable wth the value 1 for peak season and 0 for offpeak season. The estmated coeffcents on the three routes wth tme trend are presented n Table 2 4. Table 4: Estmated coeffcents of the tme trend (Standard errors n parentheses) Routes Estmates P-value R-squared of the model Bejng-Shangha 0.028 (0.015) 0.100 0.941 Bejng-Guangzhou 0.020 (0.011) 0.093 0.903 Shangha-Guangzhou 0.064 (0.015) 0.003 0.912 8

All the coeffcents of the tme trend are negatve. Hence, conduct parameters tend to declne on every route, and the competton among the three arlnes becomes more ntense. The results are consstent wth the pattern of conduct parameters estmated n Table 3, especally on the Shangha Guangzhou route, where the tme trend coeffcent s most negatve and sgnfcant at the 1 per cent level, and the conduct parameters decrease sharply. The three carrers compete wth one another more ntensely over tme. In practce, they try to enter nto the tradtonal bases of rval arlnes. For example, n May 2012, CA took over Shenzhen Arlnes amng to develop the southern Chna market. However, from the frst quarter of 2010 to the second quarter of 2011, the market shares of the three carrers on each route dd not undergo bg changes. The three bg players mantan a duopoly competton on each route, and avod fercer competton to acheve hgher profts n the whole market. To some extent, ths duopoly behavor s a tact understandng among the three arlnes. Hgh market concentraton s generally not good for consumers and socal welfare. Wthout enough competton, the Chnese arlne ndustry s characterzed by hgh prces and hgh costs. The General Admnstraton of Cvl Avaton of Chna seems to have realzed the magntude of ths problem. After numerous attempts for many years, Sprng Arlnes, a low cost carrer, fnally obtaned the traffc rghts on the Bejng Shangha route on September 30, 2011. However, the carrer only provdes one round-trp flght per day, and the departure tmes of the flghts are not very attractve. Hence, the effect of the carrer on the three bg players s very lmted. The admnstrator should gradually open the avaton market and promote far competton, whch wll lead to better servces and lower prces for the publc. 5. Concludng Remarks The market conduct of the three busest routes domnated by the three largest arlnes n Chna has been nvestgated. Whether the three carrers have a colludng behavor on a certan route s not clearly ndcated. However, the three arlnes appear to have a tact understandng wth respect to the entre market. The three domnant carrers try to avod cutthroat competton on the same route when they dvde the market. The data set shows that the competton model of MU s set to lower prces to beat ts rvals and to get a bgger market share. CZ adopts dfferent compettve strateges for dfferent rvals. Stackelberg competton s found to exst, wth MU playng the leadershp role and CZ beng the follower. CZ produces the Cournot output to compete wth CA. CA acheves the hghest profts by controllng ts costs. Although the market share of MU s the largest, ts proft s lower than that of CA, prmarly because MU s costs are much hgher than CA s. Hence, perhaps, the next step for MU should focus on lowerng costs to earn hgher profts nstead of lowerng prces to get more market share. Today, Chna has one of the most advanced hgh-speed ral (HSR) networks n the world. HSR presents convenence and affordablty to consumers, but t also poses a challenge to the survval and development of cvl avaton. For example, all the flghts between Zhengzhou and X an (505 km) were suspended n March 2010, 48 days after the openng of the HSR servce, whereas daly flghts on the Wuhan Guangzhou route (1,069 km) were reduced from 15 to 9, one year after the HSR entry (Fu et al., 2011). Wth the openng of more HSR servces n major Chnese ctes (for nstance, the Bejng Shangha HSR route started to operate on June 30, 2011), the market structure and compettve strateges of arlnes wll be sgnfcantly affected. Therefore, t s nterestng and mportant to study the mpacts of HSR on the Chnese avaton market. References Appelbaum, E. (1979), Testng Prce Takng Behavor, Journal of Econometrcs 9(3): 283-94. Azzam, A. and Rosenbaum, D. (2001), Dfferental Effcency, Market Structure, and Prce, Appled Economcs 33(2): 1351 57. 9

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