Regulations often impose quality restrictions on firms, which in turn can influence prices and welfare in a theoretically ambiguous manner. To study such quality restrictions, my coauthor and I examine the Wright Amendment by analyzing its full repeal in 2014 as a natural experiment, and the analysis is documented in the first two chapters of the dissertation. The Wright Amendment constrained airlines to offer only connected flights on many routes out of Dallas Love Field Airport. Given Southwest was the only airline serving those routes using Dallas Love Field, we interpret the Wright Amendment as imposing quality restrictions on Southwest. In the first chapter, using a difference-in-differences methodology, we find that the prices of all airlines' tickets in the affected routes were higher when Southwest's quality was constrained. In order to decompose this price effect of quality restrictions, in the second chapter, we then build a structural model, in which firms choose prices and product quality, measured by the level of nonstop service. We find that when the Wright Amendment constrained Southwest, its markup in the affected markets was lower because the market segment it served was more price elastic. For consumers, we find that leisure travelers were damaged more by the product quality constraint imposed by the Wright Amendment than business travelers, despite business travelers care more about the product quality. In the third chapter, I look at the potential entry effect in the U.S. airline industry. The potential entry effect documented in the literature has two possible explanations. The first explanation is the theory of strategic investment, which suggests a change in "real" economic factors in markets, and the second one the theory of limit pricing, which is a result of incomplete information and cost signaling. In order to distinguish between strategic investment and limit pricing, using a two-equation model, I study how the market price is affected by the potential entrant's threat to enter, which is not directly observed in data. The market price is monotonically decreasing in the potential entrant's threat to enter, and this piece of evidence supports the theory of strategic investment.

Creator

• Wang, Sibo

DOI

• https://doi.org/10.21985/n2-e6dc-fj54

Subject

• Economics

Language

• en

Alternate Identifier

• http://dissertations.umi.com/northwestern:14634
• etdadmin_upload_662278

Date created

• 2019-01-01

Resource type

• Dissertation

Rights statement

• In Copyright