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Did the entry of low cost companies foster the growth of strategic alliances in the airline industry?

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  • A. Mantovani
  • O. Tarola

Abstract

We adopt a vertical differentiation model to study the effect of deregulation in the airline industry. In particular, we show that traditional carriers form international alliances on hub-and-spoke networks to compete against low cost companies, which successfully serve short haul routes at relatively cheap prices. The alliance is profitable if the gain in terms of economies of density is sufficiently high and consumers’ utility is not significantly decreased by the indirect connection. Social welfare is also evaluated: we find interval regions where the alliance is welfare enhancing, even if it is not convenient for existing flag carriers.

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Bibliographic Info

Paper provided by Dipartimento Scienze Economiche, Universita' di Bologna in its series Working Papers with number 574.

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Date of creation: Sep 2006
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Handle: RePEc:bol:bodewp:574

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  1. Oum, Tae Hoon & Park, Jong-Hun, 1997. "Airline alliances: current status, policy issues, and future directions," Journal of Air Transport Management, Elsevier, vol. 3(3), pages 133-144.
  2. Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, vol. 18(2), pages 301-317, August.
  3. Brueckner, Jan K & Whalen, W Tom, 2000. "The Price Effects of International Airline Alliances," Journal of Law and Economics, University of Chicago Press, vol. 43(2), pages 503-45, October.
  4. Shaked, Avner & Sutton, John, 1982. "Relaxing Price Competition through Product Differentiation," Review of Economic Studies, Wiley Blackwell, vol. 49(1), pages 3-13, January.
  5. Jaskold Gabszewicz, J. & Thisse, J. -F., 1979. "Price competition, quality and income disparities," Journal of Economic Theory, Elsevier, vol. 20(3), pages 340-359, June.
  6. Barla, Philippe & Constantatos, Christos, 2005. "On the Choice between Strategic Alliance and Merger in the Airline Sector: the Role of Strategic Effects," Cahiers de recherche 0502, Université Laval - Département d'économique.
  7. Jong-Hun Park & Anming Zhang, 2000. "An Empirical Analysis of Global Airline Alliances: Cases in North Atlantic Markets," Review of Industrial Organization, Springer, vol. 16(4), pages 367-384, June.
  8. Brueckner, Jan K. & Pels, Eric, 2005. "European airline mergers, alliance consolidation, and consumer welfare," Journal of Air Transport Management, Elsevier, vol. 11(1), pages 27-41.
  9. Franke, Markus, 2004. "Competition between network carriers and low-cost carriers—retreat battle or breakthrough to a new level of efficiency?," Journal of Air Transport Management, Elsevier, vol. 10(1), pages 15-21.
  10. 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.
  11. Charles Boguslaski & Harumi Ito & Darin Lee, 2004. "Entry Patterns in the Southwest Airlines Route System," Review of Industrial Organization, Springer, vol. 25(3), pages 317-350, 08.
  12. Park, Jong-Hun & Zhang, Anming & Zhang, Yimin, 2001. "Analytical models of international alliances in the airline industry," Transportation Research Part B: Methodological, Elsevier, vol. 35(9), pages 865-886, November.
  13. Brueckner, Jan K., 2003. "The benefits of codesharing and antitrust immunity for international passengers, with an application to the Star alliance," Journal of Air Transport Management, Elsevier, vol. 9(2), pages 83-89.
  14. 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.
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