In this paper, we ask how antitrust immunity subject to a carve-out affects collusion incentives in international airline alliances. We show that the gains from economies of density due to higher interline traffic under the alliance strengthen the incentive to collude on the interhub route, while the accompanying revenue gain heightens the incentive to defect from collusive behavior. These two effects exactly cancel in the case of linear demand and linear economies of density. Under this approximation, the incentives for interhub collusion are no different before and after the formation of an airline alliance subject to a carve-out.
We are grateful to the editor and two anonymous referees for their valuable suggestions. This project has been supported by the grant F2R-CRE-PUL-10EGQH at the University of Luxembourg and FNR AM2c 4265229.
See Brueckner (2001, 2003) and Brueckner and Whalen (2000). A large additional literature on alliances exists. See Bamberger et al. (2004), Bilotkach (2005), Chen and Gayle (2007), Flores-Fillol and Moner-Colonques (2007), Gayle (2007, 2008), Hassin and Shy (2004), Park (1997), Park et al. (2001, 2003), Park and Zhang (1998), and Whalen (2007).
For empirical studies, see Evans and Kessides (1994), Salvanes et al. (2003), Fang and Sickles (2007), Miller (2010), and Zhang and Round (2011).
Although this setup is superficially different from that of Brueckner and Proost (2010), which relies on “ subfares,” the two approaches are equivalent.
As in Brueckner and Proost (2010), we do not distinguish between capacity and price choices in the interline market. As in the literature, the double-marginalization problem in the interline market is more conveniently discussed in a model with price strategies, with the chosen prices determining seat capacities on the ah and jb routes. We are not aware of discussions of double marginalization and access price models with capacity setting.
Note this conclusion need not be true when the airlines are instead allowed to cooperate in both the hj and ab markets, as argued by Bruekner (2001).
This approximation is obtained by developing a Taylor series ofaround a=0 to the first order and suppressing terms in d of order higher than 2 in the second term.
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