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Airline Code-share Alliances and Costs: Imposing Concavity on Translog Cost Function Estimation

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  • Chew Chua
  • Hsein Kew
  • Jongsay Yong

    ()

Abstract

This paper provides an assessment of how airline code-share alliances affect the costs of the airline industry. It makes two contributions to the literature. First, it measures the effects of airline alliances by estimating a translog cost function using a panel dataset of 10 major U.S.-based airlines over 29 quarters. Secondly, it ensures concavity of the estimated cost function by using the procedure suggested by Ryan and Wales (2000, Economics Letters 67, 253–260). A conventional translog cost function is first estimated and scale estimates are computed. Unfortunately, the estimated function fails the curvature requirement, which makes interpreting the estimated effects of alliances somewhat dubious. Hence, we re-estimate the cost function by imposing local concavity restrictions. We find that large alliance partners have a small negative effect on airlines’ costs, but small alliance partners’ effect on costs appear to be positive, although the magnitude is negligible. We also find material differences in the estimates of scale economies after imposing local concavity. Copyright Springer 2005

Suggested Citation

  • Chew Chua & Hsein Kew & Jongsay Yong, 2005. "Airline Code-share Alliances and Costs: Imposing Concavity on Translog Cost Function Estimation," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 26(4), pages 461-487, June.
  • Handle: RePEc:kap:revind:v:26:y:2005:i:4:p:461-487
    DOI: 10.1007/s11151-005-0223-6
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    References listed on IDEAS

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    1. Goh, Mark & Yong, Jongsay, 2006. "Impacts of code-share alliances on airline cost structure: A truncated third-order translog estimation," International Journal of Industrial Organization, Elsevier, vol. 24(4), pages 835-866, July.
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    Cited by:

    1. Zou, Bo & Hansen, Mark, 2012. "Impact of operational performance on air carrier cost structure: Evidence from US airlines," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 48(5), pages 1032-1048.
    2. repec:eee:transe:v:102:y:2017:i:c:p:1-12 is not listed on IDEAS
    3. Robert McKeown, 2017. "Where are the economies of scale in Canadian banking?," Working Papers 1380, Queen's University, Department of Economics.
    4. Kopp, Thomas & Bümmer, Bernhard, 2015. "Moving rubber to a better place - and extracting rents from credit constrained farmers along the way," EFForTS Discussion Paper Series 9, University of Goettingen, Collaborative Research Centre 990 "EFForTS, Ecological and Socioeconomic Functions of Tropical Lowland Rainforest Transformation Systems (Sumatra, Indonesia)".
    5. Linz, Teresa & Tsegai, Daniel W., 2009. "Industrial Water Demand analysis in the Middle Olifants sub-basin of South Africa: The case of Mining," Discussion Papers 49927, University of Bonn, Center for Development Research (ZEF).
    6. Chaudhuri Malika & Tonsor Glynn T & Peterson H. Christopher, 2011. "Factor Demand Analysis for Ethanol in the U.S. Refinery Industry," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 11(1), pages 1-35, April.
    7. Kazuo Ogawa, 2011. "Why Are Concavity Conditions Not Satisfied in the Cost Function? The Case of Japanese Manufacturing Firms during the Bubble Period," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 73(4), pages 556-580, August.
    8. Philip G. Gayle, 2007. "Airline Code-Share Alliances and Their Competitive Effects," Journal of Law and Economics, University of Chicago Press, vol. 50, pages 781-819.
    9. Philip G. Gayle, 2008. "An Empirical Analysis of the Competitive Effects of the Delta/Continental/Northwest Code-Share Alliance," Journal of Law and Economics, University of Chicago Press, vol. 51(4), pages 743-766, November.
    10. Du, Yan & McMullen, B. Starr & Kerkvliet, Joe R., 2008. "The economic impact of the ATA/Southwest Airlines code-share agreement," Research in Transportation Economics, Elsevier, vol. 24(1), pages 51-60.
    11. Ryerson, Megan S., 2010. "Optimal Intercity Transportation Services with Heterogeneous Demand and Variable Fuel Price," University of California Transportation Center, Working Papers qt8696z26t, University of California Transportation Center.
    12. Zuidberg, Joost, 2014. "Identifying airline cost economies: An econometric analysis of the factors affecting aircraft operating costs," Journal of Air Transport Management, Elsevier, vol. 40(C), pages 86-95.
    13. Lijesen Mark G., 2013. "Solving the Endogeneity Problem in Empirical Cost Functions: An Application to US Banks," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 13(2), pages 1051-1070, September.
    14. McMullen, B. Starr & Du, Yan, 2007. "The Economic Impact of the ATA/Southwest Airlines Code Share Alliance," 48th Annual Transportation Research Forum, Boston, Massachusetts, March 15-17, 2007 207914, Transportation Research Forum.

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    Keywords

    Airline alliances; concavity; costs; translog;

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