Defining and measuring markets

Before we move on to discussing competition on the airline markets, it is necessary to define what we mean by the notions of “market” and “market structure”. This is not as straightforward as it may initially seem. Of course, the easiest way to define an airline market is through two endpoints on a passenger's journey. We can then talk about, for instance, a London–New York market or a Paris–Rome market. We can further see which airlines fly between the two cities and call them competitors on a given market. If we find that only one airline flies between the two cities, then we could call such a route a monopoly. On the other hand, if there are five carriers providing a non-stop service (as is the case between London and New York), we can call this route competitive. Seems simple enough.

However, as we start thinking about this issue further, questions emerge. Are flights between Heathrow and JFK the same as between Gatwick and Newark? Will the airline offering five flights a day view its competitor offering five services a week on the same route seriously? What if you have a choice of both a non-stop flight and a number of one-stop journeys, involving longer total trip time – are these services “true” competitors to each other? Are flights to Dusseldorf on the same market as services to Cologne Bonn Airport? After all, a train trip between Dusseldorf airport and Cologne only takes about 40 minutes, so if you travel to the city of Cologne, you can choose to fly into either of the two airports. What about the city-pairs where travel is possible by either plane or train (such as London and Paris) – do you treat Eurostar services separately from the airlines that fly between the two cities? These are the kinds of questions the market players, analysts, and policy-makers address on a daily basis.

Economists call the exercise of identifying the relevant competitors (that is, figuring out who is and, equally importantly, who is not competing with a given service) “defining the market boundaries”. The key concept used in this exercise is called substitutability.