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Effects of the Deregulation on the Concentration of the Brazilian Air 

Transportation Industry 

Marcelo Xavier Guterres 

Aeronautical Infrastructure Engineering Division - 

Technological Institute of Aeronautics - ITA 

Av. Dr. Joao Batista de Scares de Queiroz Junior, 1500, ap31. 

Jardim das Industrias- CEP: 12240-000, Sao Jose dos Campos, Sao Paulo, BrasiL 

Phone:+55 12 39391418 

Carlos Mailer 

Aeronautical Infrastructure Engineering Division - 

Technological Institute of Aeronautics - ITA 

Divisao de Engenharia de Infi^-Estrutura Aeronautica -CTA - ITA - lEI - 

Pra9a Marechal Eduardo Gomes, 50, Vila das Acacias - CEP 12.228-900, 

Sao Jose dos Campos - Sao Paulo - Bi^sil 

Phone:+55 12 39476879 


This paper addresses the eflFects of the deregulation of the Brazilian air transportation 
industry in tains of the concentration of the market We will show some metrics that are 
commonly used to study the concentration of the industry. This paper uses the Herfindhal- 
Hirschman Index. This index tends to zero in the competitive scenario, with a large number 
of small firms, and to one in case of a monopolistic scenario. The p^er analyses the 
dynamics of the concoitration of the Brazilian domestic air transportation market, in order 
to evalxiate the effects of deregulation. We conclude that the Brazilian market presents 
oligopoly characteristics and aspects in its current stmcture that maintain the maiket 
concentrated in spite of the Deregulation measures adopted by the aeronautical authority. 

Keywords: Herfindhal-Hirschman Index , concentration. Deregulation 

1. Introdactioii 

Sales or production concentration is related to the indxjstry market distribution among 
companies according to their size. For the air passenger transportation industry the product 
that is being oflFered by the air transportation companies is the seat of an aircraft. This 

production plays a relevant part in the industry market structure since it should determine 
the behavior and development of the air transportation company. 

The economical theory suggests that structural characteristics of an industry sway its 
behavior, as w^ell as its prices, costs, profits and inventive activities in the market. This 
paper is about one of the main dimensions of the air transportation industry, the production 
concentration. It assumes that the nximber and size distribution of companies influence the 
expectations related to the behavior of the competitors. For example, in an industry 
scenario with a small number of companies, each one playing an important role in a market 
that is not coming to any growth, the increase in sales of one company will mean failure for 
the others. The companies soon discover why they lost market share and probably react 
trying to get back their participation. A company usually cannot take aggressive initiative in 
a market without consideration of the probable reaction of the competitors. Besides, the 
number of companies and their participation in the market can influence the possibility of 
collusions. Collusions will surely be successful if the nximber of companies in the industry 
is small. 

So, the reader can notice that the concentration level of an indxxstry can determine the 
dynamics of the playing companies and, indirectly, the industry own development. In a 
detailed analysis. Industrial Concentration is understood as a process of growth of the 
market power of the larger companies on the economical activity. The concentration level 
is a measurement that expresses the structure of the industry. 

One of the first studies in Brazil about concentration of an air transportation industry is the 
paper developed by Espirito Santo (2000). It contains an analysis about the quality of the 
national industry concentration and identifies reasons that may increase the industry 
concentration. In the author's own words; 

"... in 1998, VASP and Transbrasil started a code-share agreement in several domestic 
connections. Although it was finished in some months, this was the beginning of new 
domestic alliances. Practicing the code-share, the companies can commercialize their 
flights together, as if they were one company. This way, the partner companies can cut 

doym on the expenses related to giving information about flights, can come to the reduction 
of frequency in the constant connections in the agreement - and this way, cut down on the 
offering of seats and schedule - and can reduce the passenger's service level and the 
straight competition. This competition, from contestant companies, can become seriously 
involved. " 

In Oliveira's study (2001) we're able to notice the importance of studying the concentration 
in the air transportation market: 

"... Although there has been much criticism upon what we call Behavior-Structure- 
Paradigm - that consists in the relation between the concentration level in a market (its 
structure) and the power of the companies (behavior structure) - the writings on air 
transportation have become even more emphatic in pointing that the predominant 
strategies all over the world have been emphasized. Besides, the evidences of domestic 
alliances creations have been st^ciently concrete to assure that the marl^t power in the 
industry has increased more and more. That way, we ve come to the conclusion that the 
control of the concentration levels and of market power in sections like the air 
transportation has become one of the most important attributes of the authorities, looking 
forward to promoting their own good. " 

Our next section will discuss the possible ways to measure the concentration, as well as we 
intend to justify the index chosen to calculate the concentration level in the BraziUan Air 
Transportation Industry. 

2. Concentration measurements 

There are several alternative indexes to measure concentration. At first we've got to know 
however what are tiie desirable properties required fixim a concentration measurement Hall 
and Tideman (1967) suggested the following desirable properties: 

(I) a concentration index should have only one dimension. 

(II) the measurement shouldn't depend on the size of the industry, but it should consist in a 
measurement worked out among the group of companies present in the industry, that is, 
each company contribution answers for its participation in the industry or in the economy, 

(III) the concentration measxire must increase if the participation of a company in the 
market increase upon another - a smaller one. It means that the principle of transfers must 
be used, if necessary. The principle of transfers will be defined here as the process in which 
the efficient companies get part in the market because of the inefficient ones 

(IV) if all the companies are divided in similar parts, the concentration measurement must 
decrease accordingly. For example, if two companies are divided in two equal parts, then 
the concentration will have to decrease by half 

(V) the concentration measurement must be decreasing when related to the number of 

(VI) a concentration measurement should be between zero and one 

A more understandable series of properties is determined by Hannah and Kay ( 1977 ): 

(I) the adhesion of new companies of some relevant size must reduce concentration 

(II) uxiions must increase concentration 

(III) costumers changing at random for a specific brand must decrease concentration 

(IV) if Pi represents the participation of a new company, when it becomes progressively 
smaller, the effect on the concentration index must also be like that 

(V) random factors in the growth of companies should increase concentration 

Next, some of the most commonly used concentration measures will be shown, as well as 
the theory about them. 

2.1. Concentration index ( C ) 

It's the most fi'equently used measure. It measures the participation of the n biggest 
companies, that is: 




Pi - participation of company i in the maiket 
n - numba* of companies 

All the companies that are included in the measurement are equally treated; in other words, 

they receive net wei^t 1 . The concentration index only provides limited information about 

the distribution of companies through number and size. Picture 1 shows the concaitration 

of two markets in the BraziHan air transportation industry, the connections; 

Altamira ( SBHT ) - Belem ( SBBE ), 

and Belo Horizonte ( Pampulha - SBBH ) - Brasiha ( SBBR ). 


BH (Pampulha)-Brasnia 

00,00 V»-^ 100,00% 



2 3 4 

Number of companies 

Ptctnre 1 

The information on picture 1 can be used to find the minimum number of companies that 
represents some specific participation of market. In SBHT - SBBE, two companies 

represent 63,62% of the market, while in SBBH - SBBR this number goes up to 90,75%. 
It's possible to see through picture 1 that the lines do not touch each other, in any place. 
This fact implies that the organization of the connections will not be affected by the choice 
of n companies. In cases like that, for any number of chosen companies, the SBBH - SBBR 
connection will always be the most concentrated among the two analyzed. 

Picture 2 shows the concentration at two other connections in the Brazilian national air 

transportation market: 

Rio de Janeiro ( Galeao ) - Salvador 

and Sao Paulo ( Guarulhos ) - Curitiba. 


o 80 

•I— I 

•^ 60 


a> 40 



-♦- RJ (Galeao) - 

-♦-SP (Guarulhos)- 


96.83^-*— ^^^^^i — 

^^^.^♦^ 93,43 




^^ 85.79 

y^y^^^ 52,86 

/ 32,73 

<K) 1 ! 1 1 i 

2 3 4 

Number of companies 


On picture 2, the concentration index for two companies shows that SP ( Guarulhos ) - 
Curitiba market is more concentrated than RJ ( Galeao ) - Salvador one. But for 
comparisons, the concentration index considering only one company is inverted, that 
means, RJ ( Galeao ) - Salvador connection is more concentrated. 

Literally, this concentration index is, many times, presented in a different way: 



_ 1=1 

m n 



Xi - represents what the interest is 

Pi - indicates the part of market of the company on the total amoxmt 

n - total numbo' of companies in the market 

m - represents the biggest companies in the market, and m is smaller tiian /z, or similar to it 

Generally, the values used are CR4 (or CI 2), and these measurements can be defined as a 
variable number of concentration that indicates the percentage of the correspondent 
industry related to flie four (or twelve) biggest companies in the industry. Actually, what's 
considered is the participation of flie biggest companies, that means, it's the result of 
concentrating the m biggest companies in a market with n companies. 

According to Feijo et al (2001), the economical literature suggests concentration zones to 
classify the markets. These indicators can be seen next: 

(kid 1 - Comxntmtkm zones according to C and CRM indexes 

Concentration zones 


Not concentrated at all 

Markets in which the biggest companies 
have a participation of 25% or less 

A Httle concentrated 

Markets in which the participation of the 
biggest companies results between 25% and 


Those with a market participation varying 
from 50% to 75% 

Very concentrated 

The market participation of the biggest 
companies is 75% or more 

Source: Feijo et ai (2001 ) 

2.2. Herfmdhal-Hirschman Index ( HHI ) 

It can be defined as: 




Pi- participation of the company 

n - total number of companies in the industry 

The highest value an index can reach equals to 1, and this is possible when there's one only 
company in the market. The minimum value (in which the companies are all the same size) 
depends on the number of companies. That way, when n = 100, the minimxim index is 0.01. 
For example, if two air companies have, each one, a percentage of 50% of market 
participation, the Herfindhal-Hirschman index is 0.50^ + 0.50^ = Vs.The index gets near to 
zero, in a competitive case, with a great number of small companies, and it is equals to one 
in a monopoly case - it means, companies generally present great power of market in this 
situation, and that can bring loss to the costumers. We can find, in some cases, HHI values 
calculated in absolute numbers. For example, the same last situation, two companies with 
50% of market participation were considered. Their HHI value would be 5000 points (50^ "^ 
50^ " 5000 ). The square measure means that the smaller companies contribute less than 
proportionally for the index value. A simple example can illustrate the different orders 
varying according to the measxirements: 

Grid 2 - Comparison between concentration index (C) and Herfindhal-Hirschman index (HHI) 

Industrv A 




P>(%) Pi' 

Pi(%) Pi' 




. 10 





100 0,42 100 0,66 

Both scenarios bzing the conc^itration index (C) of two companies presented in 90%, but 
the Herfindhal-Hiischman index (HHI) is of 0.41 for Industry A and 0.65 for Industry B. 
The concentration index (C) does not consider the relative size of the two biggest 
companies, while flie Herfindhal-Hirschman index (HHI) does. HHI satisfies all the 
desirable conditions identified by Hall Tidanan and Hannah-Kay and mentioned before in 
this paper. Besides, this index has received increasing theoretical siqjport. Carlton and 
PerlofiF(1998) assure that there is a relationship between HHI and the Market Power, The 
market structure can be classified according to the HHI value. Some books propose the 
following classification: 

Grid 3: Market stractare dassifiled accordybog to the Herfindhal-HirsciiiiMui index 



Price competition intensity 

Perfect competition 

Usually less than 0.2 


Monopolized competition 

Usually less than 0.2 

Depends on how much 
different the products are 


From 0.2 to 0.6 

Depends on the competition 
among the companies 


More than 0.6 

Soft, imless there's the 
possibility of new 


As we could see through the studies and comparisons, there are many writings in The 
United States that verify the concentration effects on fees among cities served by air lines, 
once the industry was deregulated. Carlton and Perlofif (1998) quote some pa^jers where 

they noticed that the fees are higher where the concentration is also higher. These papers 
are from Call and Keeler (1985), Bailey, Graham and Kaplan (1985) and Graham, Kaplan 
and Sibley (1983). And they could also notice there's a relevant statistics effect of 
concentration upon development, even though it's got a modest size. The researches 
concluded by Borenstein (1992), Brueckner, Dye and Spiller (1992), Evans and Kessides 
(1993) discussed the concentration on the American market. In these writings, the most 
used measure was HHI, and that's because it respects all the desirable properties and is easy 
to be handled. 

The United States Justice Department provides the following concentration zones to 
measure the concentration level of an industry: 

Grid 4: Placing zones 




Low concentration 


Controlled concentration 


High concentration 

According to these zones, the American department uses the verified changes on the HHI to 
decide if a company fusion can be allowed or not. The agency analyses the situation 
carefully: if the intended transaction happens in a controlled concentration market, and 
provokes more than 0.01 of addition on the HHI, or 0.005 in high concentration markets, 
the agency will understand that this transaction probably wants to create, or emphasize, the 
market power (or make its functioning easier). That way, the proposal goes through a hard 
analysis to identify the possible impacts on the competition and the needy solutions to 
approve the fusion. 

In Brazil the usage of concentration measurements (HHI) in the fusion of two beer 
companies: Brahma and Antartica, could be notice 


This paper xises the Herfindhal-Hirschman Index (HHI) to analyze the concentration in the 
Brazilian National Air Transportation Industry. 

3. Concentration analysis: Brazilian National Air Transportation Industry - from 
1982 to 2000 

This section aims to verify the possible impacts on the conc^itration due to the 
do-egulation rules the Brazilian govenmient has adopted for the last few years. To do so, 
we'll show the procedures used to calcxilate the Herfindhal-Kirschman Index (HHI), and its 
development throughout the years chosen for the present study. 

We use the concept of Aggregated and Disaggregated Concentration, The Aggregated 
Concentration considers the HHI index calculated over the market participation of the 
commercial groiq)s of air companies, not over the individual participations of each 
company. For example, VARIG Organization is formed by four companies; VARIG, Rio- 
Sul, Nordeste (since 1995) and Cruzeiro (1991/92). The Aggregated Concentration 
considers the participation of the four companies as one commercial group. The 
Disaggregated Concentration on the other hand determines the HHI index for each 
company using the individual participation of each company z, as if it were an indepeodent 

To calculate HHI, a database was created, with the yearly market share of each company 
from 1982 to 2000. The primary source of information was the Annual Statistics Report of 
the Brazilian Air Transportation Industry, a yearly publication of the Civil Aviation 
Department The market participation of the national companies was measured by means of 
the offered seat.kilometers. 

Having the market participation of each company, HHI was calculated through formula 3 
(Aggregated and Disaggregated Concentration). For a better and clearer understanding 
picture 3 shows the progress of concentration levels in the national market throughout the 
years, measured in HHI. 







83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 2000 

Picture 3 

The reader can notice in picture 3 that from 1982 to 1991 the aggregated concentration kept 
high levels - as considered by the economical theory. According to grid 3, we can classify 
the market structure of that time as an oligopoly. And we know that in this market, a few 
companies are responsible for the biggest part or for the total of the production. In some 
markets, some of or all companies get profits in long terms, once there are obstacles to the 
entrance of new companies in the market (that makes more difficult the joining of new 
companies). In this specific case, there was an oligopoly controlled by the government until 
1991. The fees were controlled by the public power, aiming to cover costs and expenses of 
minimum wages. The policies in use from 1982 to 1991 were in great part the responsible 
for the high concentration levels of the national industry. The controlled competition was 
adopted because the authorities believed that the free competition among companies could 
make them grow weak, technically, operationally and financially. 

Other reasons that helped the achievement of high market concentration were: 

(I) entrance obstacle : the joining of a new company in the market needed government 

authorization, and what could be noticed was that, in general, it didn't allow the joining, 


aiming to "avoid great competition". From 1982 to 1991, there weren't new companies' 
joining the industry, but in 1986. One thing that contributed to this situation was that there 
were great economics of scale (Silva e Lopes, 1994). So, if one company wanted to join the 
market, it would have to produce in smalla- scale and get higher costs than the established 
ones. At this time, the Department of Civil Aviation divided the country in five areas, and 
chose, for each one of these regions, one local company to monopolize routes between 
countryside and o^itals. One needy aspect for a competitive market to exist is the 
possibility of companies freely coming and going in the market, and that wasn't exactly 

According to several authors, the control air companies have upon computer resa-vation 
systems is considered the main obstacle when new companies want to join the market. In 
Brazil, till the end of the 80' s, each one of the national companies had its own reservation 
system. From 1990 on computer reservation systems started to be more dififused. These 
systems were widely known, and the Brazilian companies had to change their old and poor 
systems for one of the most known systems throughout the world - not to harm their 
internal sales (Nishime, 1996). That's why there isn't reservation systems controlled by 
national companies anymore nowadays; almost all of them use systems controlled by 
foreign companies. In late 80's and early 90' s, if a new company wanted to join the market, 
it would find difiBculties in having its flights presented in similar conditions of those 
already in the market. And if by chance, it chose a new system, it would have to make it 
popular - it was an expensive procedure and yet, it would face the opposition of the ones 
already in place. If it chose to join one of the most known systems in Brazil, it would have 
to share places with a big company, what, for sure, woxdd put the beginner in disadvantage 
when using or presenting flight information. Yet, a beginner would have to face the 
preference for the companies with higher market share. 

Hall and Tidman (1967) assured that the concentration must decrease when related to the 
number of companies, and that way, the obstacles that didn't permit new companies to get 
in the market contributed to high concentration in the national air transportation market, 


(II) route and frequencies : the regulated market did not allow companies to compete on 
fees; so, one alternative instrument that could have been used was the increase in routes and 
frequencies. But these possibilities were also controlled by the Department of Civil 
Aviation, the institution practically imposed its progress factors. These limits controlled 
any kind of competition among air companies, leading to stronger companies (the big ones) 
and stronger groups formed by companies with objectives in common. The increase in 
concentration happened because the big companies had their participation in the market 
higher at the expense of the smaller ones. 

Another reason that led the market to a high concentration was VARIG group. It presented 
a superior growth when related to the others. At that time the group was formed by two 
national companies (Cruzeiro and VARIG) and two other regional companies (Rio-Sul and 
Nordeste). Besides, TAM started to get its group together, with Brasil Central from 1986 

The reader must have come to the conclusion that the government ruled the concentration 
of the companies from 1982 to 1991. This instrument can be useful in promoting the 
economic eflSciency of the companies, however, we have to consider its effects on the 
passenger, yet. This high level of concentration in the industry brought losses to the users, 
as we can see: high fees, decrease in routes and frequencies and smaller number of served 
cities - everything because there was no competition in the area. 

But from 1992 on, this situation started to change, and there was an opening process 
controlled by the air transportation section in the Department of Civil Aviation. Once again, 
if we observe picture 3, we'll see that the aggregated concentration of the industry started to 
diminish in 1990.* This decrease was interrupted in 1993, when Cruzeiro left VARIG group. 
Therefore, the new rules set for the air transportation were efficient, when considering the 
effect on the concentration. 


This way, we'll display our analysis to check if this low concentration level was enough to 
bring any new competition to Hxc maiket. First of all, it's possible to see that the number of 
companies in the maiket grew - more air companies in the market means less concentration 
measurement. As it's known, the concaitration is decreasing when related to the number of 
companies acting in the market. Again the policy in place played important role in the 
process of making the number of companies in the maiket grow. In 1992, the gov^nment 
banished some obstacles for Hxc regional companies. Article of number 688/GM5/92 set the 
so called Special Air Lines (connecting some downtown airports: Congonhas, Santos 
Dumont and Pampulha among themselves and with Brasilia's airport). Then, these regional 
companies started to have more possibilities of competing, and counting on the advantage 
of being in the central airports, with the greatest volume routes of traffic. Another important 
factor was that tiiey could start being used from any region. 

In the ^ud of 1997 and beginning of 1998, the institution sent two important management 
writings to emphasize the conq>etition among the companies of air transportation. 
986/DGAC provided the conq>aiii» with fees and discounts of 65% on the steady value, 
and 05/GM05, that freed "any Brazilian air company to use the special lines". These two 
new happenings provoked immediate impacts on the section's competition, once in March / 
1 998 a real war of fees was started. 

The direct reflexes of this deregulation can be summarized in two main aspects: 

(I) air fares reduction and 

(II) multi air fares instroduction 

As the Department of Civil Aviation stopped controlling the concentration of the national 
company, the air transportation companies started to set diffCTent strategies to act in the 
market. That way, some national companies began to use more efficient instruments in 
management. The so called Yield Management techniques, already in use in many coimtries 
all over the world (Oliveira, 2000). Using these techniques, even only in part, can be 
considered a good indicator that the maiket presents a greater sense of competition if 


compared to the years when the concentration level was controlled by the government. So, 
the industry opening led the national companies to set new goals to their organizations, and 
to search ways for a better participation in the market. 

Even with this market opening, there still are several obstacles blocking new companies to 
join Brazilian market. These obstacles make the industry even more concentrated, and 
there's loss if competing. We have: 

(I) access to a basic infrastructure: a company that would like to start air service would 
face a big difficulty: get space at the airports, because almost all of them are totally busy 
with the companies that already exists. The situation gets even harder if the "candidate 
company" tries to enter the market using the airports with more traffic - where it's more 
difficult to get space, not only related to physical conditions of the airport, but also to to the 
limitations of frequency that the new company could have. There's also the fact that the 
noble timetables can be totally filled, and only the periods of less movement would rest. 
The space given to each company is determined by Infraero, the company that manages the 
most important airports in the country, according to their respective market participation. 
On the last few years, problems of traffic started to appear in airports, mainly in Congonhas 
(SP). They blocked the taking off and landing of the companies, and due to that, any 
company, new or not, that doesn't operate in Congonhas will face obstacles - physical 
dependences and windows, taking off in noble timetables totally busy. Most of the main 
Brazilian airports on tiie other hand do not hava any serious problem of space for new 
eventual companies. But this does happen due to the efforts of Infraero, that appears to take 
the appropriate actions to maintain the capacity of these main airports. As we see, the 
situation is comfortable, however, in the future Infraero 's decisions related to airport spaces 
will be seen as if they were a market institution. So, we must include the decisions that 
refer to the management of airports on the political acting of the government, related to the 
air transportation market (mainly subjects about spaces in the airports). 

(II) market strategies for the companies that already exist: some market strategies used by 
air companies can make things even more difficult if a new company wants to join the 


maiket. We can anphasize the existence of programs that try to create loyalty to a certain 
company or group through prizes. 

In 1996, VASP, VARIG and TAM started to such programs, stimulating passengers to be 
loyal to the airline. This has made passengers to elect to use the service of one company - 
at least the ones who use it frequently - and it makes more difficult for smaller conqjanies 
to participate in the market ( fliey have less participation in routes detemiined in the maiket 
as agroiq)). 

Junior et aL (1998) conclude that a negative fact coming from the deregulation was that it 
facilitated the acquisition of smaller companies by the large national or regional companies. 
Therefore, although the concentration level decreased because of the measures adopted, the 
market today could be a lot less concentrated if the authority had used instruments to 
control the conc^itration. We can check it ihiuugh pictufe 3, where we have the 
concentration measured without thinking about groiq) influ^ice (disaggregated 
concentration). We come to the conclusion that the authority made a mistake in this aspect, 
because it allowed comercial groijqp foimation. This situation in the future can provoke a 
decrease in competition in this section, once as time goes by, there's a greater chance for 
these groiqjs to use their market power, 

4. Final considerations 

The Brazilian market, evai after the deregulation measures adopted, keeps several 
characteristics of an oligopoly. The opening process of the Brazilian industry is recent, and 
that's why it's going through some adjustments according to the new policies in the market. 
Some corrections and adjustments on numba* of companies working on the deeper routes 
of the Brazilian market probably will come to happai according to the great number of 
companies offering services for any of these routes. That emphasizes one fact: the industry 
has tended to concentrate, it means, the Brazilian market has followed trends from other 
coxmtries with similar markets, and that makes the number of air companies offering the air 
transportation service small. So, a few companies have relevant parts of the domestic 
market, leading to a control of market not desired, when it comes to competition. The 


sections that control the air transportation market could take some initiatives, so that the 
market would be more competitive, like trying to avoid abuses when using reservation 
systems, coordinate decisions about routes and spaces in the airports, check and control 
alliances and agreements that can result in excessive control of routes and frequencies of an 
airport on an only group's hand. Just to control fees of an activity does not mean a decrease 
in prices because of competition, it's also necessary a proper environment to exist 
competition. Following trends noticed in other countries, the Brazilian market has a small 
number of companies, what means a concentrated market. Even in markets like the 
American one, totally free, the number of companies is proportionally small, and there's 
also the case of one only company operating in an airport. 


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