Competition and cooperation in international air travel markets with complements and substitutes

This paper studies how increased cooperation among airlines influences pricing and welfare outcomes in international air travel markets. To capture the inherent complementarity of cross-border air travel services, we explicitly model these markets as bilateral vertical structures, where two international airlines provide complementary services to each other before setting airfares for passengers' entire trips. We analyze equilibrium outcomes under various cooperation regimes, including simple interlining, codesharing (with and without antitrust immunity), and joint ventures. Coordinated pricing of complementary services helps alleviate double marginalization, benefiting interline passengers and enhancing airline profits. However, as cooperation deepens toward merger-like integration, the risk of collusion may ultimately harm both consumer and social welfare. These outcomes are critically affected by economic factors such as the degree of substitutability among competing airline services, the type of revenue-sharing schemes, the relative size of the markets involved, and the presence of traffic-density economies on the interhub route.