Airline Alliances, Carve-Outs and Collusion

Jan K. Brueckner 2  and Pierre M. Picard 1
  • 1 CREA, Université du Luxembourg, 162A rue de la faiencerie, Luxembourg 1510, Luxembourg; and CORE, Université catholique de Louvain, voie Roman Pays 34, Louvain-la-Neuve, 1348, Belgium
  • 2 Department of Economics, University of California, Irvine
Jan K. Brueckner and Pierre M. Picard

Abstract

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.

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