Competition Regimes and Air Transport Costs: The Effects of Open Skies Agreement

The relevance of transport costs has increased as liberalization continues to reduce artificial barriers to trade. Is it worthwhile to implement policies designed to increase competition in transport markets? Focusing on air transport, this paper quantifies the effects of liberalization of air cargo markets on transport costs. Between 1990 and 2003, the United States implemented a series of Open Skies Agreements, providing a unique opportunity to assess the effect that a change in the competition regime has on prices. In our sample, Open Skies Agreements reduce air transport costs by 9% and increase by 7% the share of imports arriving by air. Those results hold for developed and upper-middle-income developing countries but for lower-middle-income and low-income developing countries Open Skies Agreements do not reduce. This paper was presented at the Fourth LAEBA Annual Meeting, held in Lima, Peru, on June 17, 2008.