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Aviation is essential for transporting both goods and people, as well as transmitting ideas. As a small open economy with disperse populations across a vast landmass, aviation is particularly important for Australia. Using comprehensive microdata, this paper is the first to examine how competition has evolved in the aviation sector and the impact of competition on domestic airfares and consumer welfare.
We find a strong link between the degree of competition and airfares across the aviation network, with increases in the number of airlines on a route resulting in a significant reduction in airfares. This effect is strongest when competition is starting from a low base, for example, on regional or remote routes.
Our results also show that increasing competition lowers price growth, and that in some cases, the mere threat of competition can lower airfares. Overall, we show that competition has strong positive implications for passenger welfare through reducing prices. For instance, competition in the domestic aviation sector is estimated to have saved consumers between $27.2 billion and $35.2 billion over the last 14 years, and the presence of an additional airline on a route leads to airfares that are 5 to 10 per cent lower.
While focussed on the aviation sector, our paper draws on a broader point that competition can impact both prices and price growth and deliver significant cost of living benefits to consumers.