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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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  • Andrea Mantovani

    () (University of Bologna)

  • Ornella Tarola

    () (University of Cassino)

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.

Suggested Citation

  • 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.
  • Handle: RePEc:rpo:ripoec:v:97:y:2007:i:1:p:189-220
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • L29 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Other
    • L93 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Air Transportation

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