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Collusive Duopoly: The Economic Effects of Aloha and Hawaiian Airlines’ Agreement to Reduce Capacity

In the aftermath of the terrorist attacks on September 11, 2001 (9/11), Congress passed the Aviation and Transportation Security Act (ATSA). Section 116, Air Transportation Arrangements in Certain States, provided a foundation for Aloha Airlines and Hawaiian Airlines to obtain temporary antitrust immunity for their agreement to coordinate a reduction in passenger seat capacity on routes between Hawaii’s five major interisland airports. While the provision did not apply only to Hawaii, it applied only to intrastate flights, and only Hawaiian and Aloha Airlines, among U.S. airlines, took advantage of this statute to jointly reduce passenger capacity in the wake of sharply declining demand for air travel after 9/11. The limited antitrust exemption provides a rare opportunity to examine the economic effects of collusively reducing capacity in a duopolistic market. We present an economic analysis of the agreement, and advance the testable hypothesis that capacity reduction will result in fare increases. We also demonstrate empirically that reductions in passenger capacity under the agreement did contribute to sharply rising airfares in Hawaii’s interisland air travel market. Our analysis suggests that explicit agreement is more effective in reducing competition than tacit collusion in a tight oligopoly. Moreover, our empirical findings indicate that, following the expiration of the agreement, tacit collusion may have been sufficient to enable the parties to continue their supra-competitive pricing. We also document the entry of a third interisland carrier following the increase in interisland fares, and the price war that followed. Finally, our empirical results provide an economic foundation for the policy implications that we advance in our concluding section.


Published: “Collusive Duopoly: The Effects of the Aloha and Hawaiian Airlines” Agreement to Reduce Capacity,” with James Mak and Roger Blair, Antitrust Law Journal, Vol. 74, No. 2, 2007, 409-38.



Staff Support at UH Manoa: A Comparative Analysis

This study provides a comparative analysis of the staff support at the University of Hawai’i at Mānoa (UHM), its peer group (Peer), and all 4-year public Doctoral/Research-Extensive Universities (DREU).i To evaluate whether UHM is providing too little or too much staff support to students and faculty, we compare the ratio of full-time equivalent (FTE) staff to FTE enrollment and the ratio of FTE staff to FTE faculty across the three groups of schools. In addition to aggregate staff comparisons, we also evaluate specific support staff categories: executive, administrative, and managerial; other professional (support/service); technical and paraprofessional; clerical and secretarial; skilled crafts; and service/maintenance.

UHero project report

The Impact of 9/11 and Other Terrible Global Events on Tourism in the United States and Hawaii

This article reviews recent trends in travel and tourism in the United States and Hawaii to ascertain how the terrorist attacks of 9/11 and subsequent terrible global events affected tourism flows. United States tourism has not recovered fully from 9/11 and other international shocks; indeed, recovery may be a long way off. By contrast, Hawaii tourism is enjoying robust growth in the aftermath of 9/11 as growth in tourist arrivals from the mainland has offset declines in international visitors. We suggest that Hawaii’s current tourism boom is explained in part by the diversion of United States travel from foreign travel. The article demonstrates the usefulness of vector error correction models to generate dynamic visitor forecasts, which we use to determine whether tourism in Hawaii has recovered fully from 9/11 and other terrible international events. The article considers policy options for facilitating the recovery of international tourism to the United States.

Published: Bonham, C., Edmonds, C. and Mak, J., 2006. The impact of 9/11 and other terrible global events on tourism in the United States and Hawaii.  Journal of Travel Research, 45 (1), 99-110.

working paper version

Rationality and Heterogeneity of Survey Forecasts of the Yen-Dollar Exchange Rate: A Reexamination

This paper examines the rationality and diversity of industry-level forecasts of the yen-dollar exchange rate collected by the Japan Center for International Finance. In several ways we update and extend the seminal work by Ito (1990). We compare three specifications for testing rationality: the ”conventional” bivariate regression, the univariate regression of a forecast error on a constant and other information set variables, and an error correction model (ECM). We find that the bivariate specification, while producing consistent estimates, suffers from two defects: first, the conventional restrictions are sufficient but not necessary for unbiasedness; second, the test has low power. However, before we can apply the univariate specification, we must conduct pretests for the stationarity of the forecast error. We find a unit root in the six-month horizon forecast error for all groups, thereby rejecting unbiasedness and weak efficiency at the pretest stage. For the other two horizons, we find much evidence in favor of unbiasedness but not weak efficiency. Our ECM rejects unbiasedness for all forecasters at all horizons. We conjecture that these results, too, occur because the restrictions test sufficiency, not necessity. In our systems estimation and micro- homogeneity testing, we use an innovative GMM technique (Bonham and Cohen (2001)) that allows for forecaster cross-correlation due to the existence of common shocks and/or herd effects. Tests of micro-homogeneity uniformly reject the hypothesis that forecasters across the four industries exhibit similar rationality characteristics.

Published: Richard Cohen, Carl Bonham and Shigeyuki Abe. "Rationality and Heterogeneity of Survey Forecasts of the Yen-Dollar Exchange Rate: A Reexamination." Handbook of Financial Econometrics and Statistics. Ed. Cheng-Few Lee and John C. Lee. New York: Springer, 2015. Print and eReference.

working paper

Planning for Sustainable Tourism in Hawai‘i: Economic and Environmental Assessment Modeling Study


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State Financing of Research Universities: The Role of State and University Characteristics

This study estimates the effect of underlying determinants on state funding of Doctoral/Research-Extensive Universities (DREU) in the U.S. Using panel data on 98 DREU over the period from 1987 to 2002, we estimate the effect of a variety of DREU and state characteristics while controlling for institutional level unobserved heterogeneity. Unlike previous studies, we focus solely on DREU, so our estimation results are driven by the within variation of DREU, not by the between variation across different types of universities and colleges. We consider determinants not previously studied such as the competitiveness of programs and quality of students, the mix of degree programs and professional schools, the degree of research orientation of a university, the effects of economies of scale (number of students), the cost of providing education services, and other state characteristics. Not surprisingly, we find that these variables are important factors determining state funding of DREU. Finally, we provide four case studies to illustrate the use of our model in evaluating the funding position of various universities.

working paper

Funding the University of Hawaii at Manoa

The composition of funding at the University of Hawai‘i at Mānoa (UHM) has changed markedly over the past decade. While experiencing tremendous growth in funded research activities, and modest growth in tuition revenues, state appropriations have grown relatively little. As a result, the share of total funding coming from state appropriations has declined significantly.  This report extends the work of Lee and Bonham (2006) by providing more detail on the funding of UHM and by comparing UHM to its peer group.


Sang-Hyop Lee, and Carl Bonham, January 17, 2006.



Identifying Long-run Cointegrating Relations: An Application to the Hawaii Tourism Model

Abstract Cointegration analysis has gradually appeared in the empirical tourism literature. However, the focus has been exclusively on the demand side, neglecting supply influences and risking endogeneity bias. One reason for this may be the difficulty identifying structural relationships in a system setting. We estimate a demand-supply model of Hawaii tourism using a theory-directed sequential reduction methodology suggested by Hall, Henry, and Greenslade (2002). The resulting model illustrates the viability of such an approach as well its challenges.

Published: “Modeling Tourism: A fully identified VECM approach”, with Byron Gangnes and Ting Zhou, International Journal of Forecasting, Vol. 25, 2009, 531-49.

working paper

Private versus Public Financing of State Destination Promotion

Until 1993 all U.S. state governments actively financed the promotion of travel to their states. In recent years, however, there has been growing public sentiment that governments should not directly engage in or fund tourism promotion. Colorado voters abolished their state's tourism board in 1993, while four other states are also looking for ways to privately fund state travel promotion. This article examines whether current efforts to induce greater private funding of destination travel promotion are likely to succeed. It is suggested that a broad-based, dedicated travel industry promotion tax is an effective way to reduce free riding by travel businesses and increase private funding of destination promotion.

Published:  Bonham, C. and Mak, J., 1996. Private versus public financing of state destination promotion.  Journal of Travel Research, 35 (2), 3-10.

Intervention Analysis with Cointegrated Time Series: the Case of the Hawai‘i Hotel Room Tax


Published: Bonham, C. and Gangnes, B., 1996. Intervention analysis with cointegrated time series: The case of the Hawai‘i hotel room tax," Applied Economics, 28 (10), 1281-93.

Testing the Rationality of Price Forecasts: Comment


Publilshed: Bonham, C. and Cohen, R., 1995.  Testing the rationality of price forecasts: Comment.  The American Economic Review, 85 (1), 284-289.

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