Chapter 2: How Airline Markets Work...Or Do They?
Regulatory Reform in the Airline Industry
Severin Borenstein and Nancy L. Rose
October 2008

Severin Borenstein is E.T. Grether Professor of Business Administration and Public Policy at the Haas School of Business, U.C. Berkeley (www.haas.berkeley.edu), Director of the
University of California Energy Institute (www.ucei.org), and a Research Associate of the
National Bureau of Economic Research (www.nber.org). Address: Haas School of Business,
University of California, Berkeley, CA 94720-1900. Email: borenste@haas.berkeley.edu.
Nancy Rose is Professor of Economics at the Massachusetts Institute of Technology (econwww.mit.edu) and a Research Associate of the National Bureau of Economic Research.
Address: MIT Department of Economics, E52-280b, 50 Memorial Drive, Cambridge MA
02142-1347. Email: nrose@mit.edu.
Nancy Rose gratefully acknowledges fellowship support from the John Simon Guggenheim
Memorial Foundation and MIT. We thank Andrea Martens, Jen-Jen L’ao, Yao Lu and
Michael Bryant for research assistance on this project. For helpful comments and discussions, we thank Jim Dana, Joe Farrell, Michael Levine, Steven Berry, participants in the
NBER conference on regulatory reform, September 2005, and seminars at University of
Toronto, Northwestern University, University of Michigan, UC Berkeley, and UC Davis.
This paper is forthcoming as Chapter 2 of Economic Regulation and Its Reform: What
Have We Learned?, N.L. Rose ed., University of Chicago Press.

1

Introduction
Government policy rather than market forces shaped the development and operation of scheduled passenger air service in almost all markets for the first six decades of the airline industry’s history. Government intervention in commercial aviation coincided with the industry’s inception in the aftermath of World War I, with many