Regulation and Incentives in European Aviation

The aim of this Paper is to evaluate simultaneously market power and the incentives faced by carriers to improve efficiency, taking into account the regulatory changes that have affected the European airline industry. We construct and estimate a model that includes demand, capacity, and cost equations. The latter accounts for inefficiency and cost-reducing effort. Using a non-nested test and observations on the largest European airlines between 1985 and 1999, we show the importance of following such an approach. We also find that the introduction of the last EU package of deregulatory measures has affected carriers’ behaviour in a significant manner.