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This chapter reviews the effects of air transport liberalization, and investigates the roles played by airport-airline vertical arrangements in liberalizing markets. Our investigation concludes that liberalization has led to substantial economic and traffic growth. Such positive outcomes are mainly due to increased competition and efficiency gains in the airline industry, and positive externalities to the overall economy. Liberalization allows airlines to optimize their networks, and thus may introduce substantial demand and financial uncertainty to airports. Vertical arrangements between airlines and airports may offer a wide range of benefits to the parties involved, yet such arrangements could also lead to airline entry barriers which reduce the effects of liberalization. Three approaches have been developed to model the effects of liberalization in complex market conditions, which include the analytical, econometric and computational network methods. These approaches should be selectively utilized in policy studies on liberalization.

This chapter reviews the key results obtained in previous studies of airline mergers. It is found that the effect of mergers on airfares is dependent on the network configurations of merging airlines. Fare increases are frequently observed on overlapped routes. However, if the networks of two merging airlines are complementary, the expanded network after the merger leads to cost savings, increase in travel options, and improvement in service quality. Therefore, in a deregulated market, with few entry barriers, relaxing merger regulations is likely to improve welfare. However, most welfare evaluations do not incorporate quality changes or dynamic competition effects. Empirical investigations are primarily ex post analysis of mergers that have already passed antitrust reviews. The relationship between market concentration and welfare might be nonlinear and market specific. Therefore, airline mergers and alliances should be reviewed case by case. Methodological improvements are needed in future studies to control for the effects of complicating factors inherent in ex post evaluations.

The real costs of trade, the transport and other costs of doing business internationally, are very important determinants of a country's ability to participate fully in the world economy. Remoteness and poor transport and communications infrastructure isolate countries, inhibiting their participation in global production networks. This paper investigates the dependence of transport costs on geography and infrastructure It shows that infrastructure is quantitatively important in determining transport costs, and improvements in infrastructure can dramatically increase trade flows. It also finds that the low level of Northeast Asian countries' trade flows is largely due to poor infrastructure. Competition among countries in East Asia to maintain or become a logistic hub in the region is severe. This is reflected in the competition to build or expand airports and seaports in the region. Competing countries need to find ways of cooperating to achieve an efficient resource allocation in the region as a whole.