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On The Choice between Strategic Alliance and Merger in the Airline Sector: The Role of Strategic Effects

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  • Philippe Barla
  • Christos Constantatos

Abstract

We consider a market with three competitors, two of which decide to cooperate. Firms first choose capacity under demand uncertainty, then compete in quantities after the uncertainty has been resolved. We specify strategic alliance (SA) as an agreement where two airlines jointly choose capacity and divide it among themselves. Contrary to the full merger case, after demand is revealed the alliance members market their capacity shares independently. Our contribution is twofold. First, we extend the well known Salant et al. (1983) result to the case of strategic alliance, that forming an alliance is not profitable unless cooperation leads to cost synergies. Second, we find that the profit of the cooperating firms is greater under SA than under full merger. These results imply that the SA always requires less cost saving than the merger in order to be profitable. © 2006 LSE and the University of Bath

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Bibliographic Info

Article provided by London School of Economics and University of Bath in its journal Journal of Transport Economics and Policy.

Volume (Year): 40 (2006)
Issue (Month): 3 (September)
Pages: 409-424

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Handle: RePEc:tpe:jtecpo:v:40:y:2006:i:3:p:409-424

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Web page: http://www.bath.ac.uk/e-journals/jtep

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  1. Chen, Zhiqi & Ross, Thomas W., 2003. "Cooperating upstream while competing downstream: a theory of input joint ventures," International Journal of Industrial Organization, Elsevier, vol. 21(3), pages 381-397, March.
  2. repec:ebl:ecbull:v:12:y:2005:i:4:p:1-11 is not listed on IDEAS
  3. Barla, Philippe & Constantatos, Christos, 2000. "Airline network structure under demand uncertainty," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 36(3), pages 173-180, September.
  4. Barla, Philippe & Constantatos, Christos, 2005. "Strategic interactions and airline network morphology under demand uncertainty," European Economic Review, Elsevier, vol. 49(3), pages 703-716, April.
  5. Morasch, Karl, 2000. "Strategic alliances as Stackelberg cartels - concept and equilibrium alliance structure," International Journal of Industrial Organization, Elsevier, vol. 18(2), pages 257-282, February.
  6. Brueckner, Jan K., 2001. "The economics of international codesharing: an analysis of airline alliances," International Journal of Industrial Organization, Elsevier, vol. 19(10), pages 1475-1498, December.
  7. Salant, Stephen W & Switzer, Sheldon & Reynolds, Robert J, 1983. "Losses from Horizontal Merger: The Effects of an Exogenous Change in Industry Structure on Cournot-Nash Equilibrium," The Quarterly Journal of Economics, MIT Press, vol. 98(2), pages 185-99, May.
  8. Lin, Ming Hsin, 2004. "Strategic airline alliances and endogenous Stackelberg equilibria," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 40(5), pages 357-384, September.
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Cited by:
  1. Andrea Mantovani & Ornella Tarola, 2007. "Did the Entry of Low Cost Companies Foster the Growth of Strategic Alliances in the Airline Industry?," Rivista di Politica Economica, SIPI Spa, vol. 97(1), pages 189-220, January-F.
  2. Jan K. Brueckner & Stef Proost, 2009. "Carve-Outs under Airline Antitrust Immunity," CESifo Working Paper Series 2848, CESifo Group Munich.
  3. Chun, So Yeon & Kleywegt, Anton & Shapiro, Alexander, 2013. "Resource Exchange Seller Alliances," MPRA Paper 49759, University Library of Munich, Germany.
  4. Bilotkach, Volodymyr & Hüschelrath, Kai, 2012. "Airline alliances and antitrust policy: The role of efficiencies," Journal of Air Transport Management, Elsevier, vol. 21(C), pages 76-84.

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