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Essays on the Airline Industry

Shih-Hsien Chuang, University of Nebraska - Lincoln


This dissertation centers on the US airline industry. It consists of a chapter primarily in the field of public economics (Chapter 2), another primarily in the field of industrial organization (Chapter 3), and the other which incorporates interests in both fields (Chapter 1). In Chapter 1, we investigate tax incidence of the September 11 Security Service Charge, which is levied on domestic travels. We contribute to the literature by providing fresh evidence of tax incidence in the airline industry, and demonstrating heterogeneity of the pass-through rates in some products. Empirically, we find two central results: (1) the tax is over-shifted onto passengers, and (2) such tax incidence decreases as competition increases. Negative pass-through is detected, and we discuss some potential contributing factors. In Chapter 2, we examine how salient the airline taxes are to individuals demand. We show that passengers over-react to taxes in the case of nondirect flights. In addition, we find that people respond to tax changes even more aggressively if the airport (of origin) is close to a nearby airport with more connections available. Such a parameter drops as the passenger level increases, indicating that passenger value connectivity and amenities provided in larger airports. Moreover, with a higher ”effective” tax rate, over-optimization is also higher. We extend the literature by examining the salience of a good with the posted price being tax-inclusive instead of tax-exclusive, and shedding lights on the under-studied tax structures in the airline industry. In Chapter 3, we scrutinize “rockets and feathers,” the phenomenon of sticky prices, in the airline industry. We focus on the two distinct characteristics of fuel price stickiness: the magnitude and the speed of adjustment. Counter to what people expect, fares respond to fuel cost decrease with a greater magnitude compared to fuel cost increase. The finding on the speed of adjustment is consistent with carriers’ general practices of looking forward six months for hedging. The pricing pattern is robust to the extent that different subsamples all present similar findings, although minor heterogeneities do illustrate key aspects of the industry.

Subject Area


Recommended Citation

Chuang, Shih-Hsien, "Essays on the Airline Industry" (2018). ETD collection for University of Nebraska-Lincoln. AAI10844812.