07 January 2007

"Empty Core" Theory and the Airline Industry

A comment made to me at the Civil Aviation Authority Christmas function in December has had me hunting down academic work on something called "empty core" theory as a possible insight into competition in the airline and shipping industries. Given the appalling record of profitability of the global airline industry over the years and the importance of finding the optimal form of government economic regulation/intervention, this would seem to be a particularly important area of economic theory to get right.

For lay readers an article Why Air Travel Doesn't Work by Timothy Smith that appeared in FORTUNE magazine back in 1995 provides a non-technical introduction to the theory and its application.

Work in this area, which has its basis in game theory, seems to owe much to University of Chicago economist Lester Telser.

With respect to the airline industry, transport economist Kenneth Button of the George Mason School of Public Policy and the Transportation Policy, Operations and Logistics Center has shown an active interest in this area.

With respect to shipping, and in particular the conference system, William Sjostrom from the Centre for Policy Studies at the National University of Ireland, Cork, has taken an active interest. He write AtlanticBlog.

In terms of material available free on the web the following is of interest:

Application of Core Theory to the U.S. Airline Industry (2005) by Vidapuri Raghavan and Jayathi Raghavan
Ocean Shipping Cartels: A Survey (2004) by William Sjostrom
Empty Cores in Airline Markets (2002) by Kenneth Button

I have added links to these papers to the Transport section of my Home Page.

I am very interested to find out more about any criticisms of this theory and thoughts as to the practical application of this thinking for transport policy makers and competition regulators.

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