| Sumario: | A model was developed to estimate the return to scale, the return to density (RTD), and technical change in the U.S. airline industry by using a system of input demand functions derived from cost minimizing behavior of the individual airlines. A flexible cost function that satisfies global concavity property implied by economic theory was employed. The system of input demand functions was estimated using panel data for the period 1970-84 on truck and local service airlines. The estimates of RTD provide evidence of economies of density, which has declined to 1.1987 from 1.3666 in the era of deregulation. This result suggests that airlines have taken advantage of falling average cost by increasing output through more flights and denser seating arrangements. The economies of density have not been fully exhausted after deregulation, however. In addition, the results indicate that efficiency gains from airline mergers are likely to be slight.
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