| Sumario: | This article analyzes the equilibrium and welfare in unregulated airline markets. The demand for air transportation in a stylized city pair market is assumed to depend upon the ticket price and two aspects of service quality, flight frequency and the load factor. The results of the analysis have important implications for both public policy and the direction to be taken in future empirical research. The divergence between the Nash equilibrium and a zero profit welfare optimum suggests that, in theory, a policy of price regulation and free entry would yield higher welfare than one of complete deregulation. However, whether or not one wishes to retain the current unwieldy regulatory apparatus in order to improve market performance must ultimately depend upon the quantitative divergence of the unregulated equilibrium from the welfare optimum. It can be demonstrated that the magnitude of this divergence depends quite directly on the structural effects of load factor changes on market demand. As noted earlier, whether or not a market admits the possibility of a zero profit welfare optimum depends upon the structural effects of frequency on market demand. Therefore intelligent policy formulation clearly requires accurate estimation of structural air travel demand functions capable of isolating the effects of frequency and load factor as well as price.
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