The Price and Welfare Effects of Airline Alliances
Whalen, William Tom
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https://hdl.handle.net/2142/85664
Description
Title
The Price and Welfare Effects of Airline Alliances
Author(s)
Whalen, William Tom
Issue Date
1999
Doctoral Committee Chair(s)
Jan Brueckner
Department of Study
Economics
Discipline
Economics
Degree Granting Institution
University of Illinois at Urbana-Champaign
Degree Name
Ph.D.
Degree Level
Dissertation
Keyword(s)
Economics, Commerce-Business
Language
eng
Abstract
These papers provide theoretical and empirical evidence for the price and welfare effects of airlines alliances. The first chapter develops a model for the price effects of international airline alliances and empirically tests the predictions. Two substantive claims from the theoretical models are that allied firms, relative to non-allied firms, should charge lower fares in interline markets, but in gateway-to-gateway markets, the fare should rise. The former occurs because alliance firms price interline faxes cooperatively, internalizing the externality that arises from the noncooperative pricing of non-allied firms. In addition, since a price reduction allows the alliance to capture more market share, its traffic densities increase, lowering marginal cost and reducing fares further. In the gateway-to-gateway markets, fares rise because the number of competing firms shrinks when airlines ally, and there is no joint pricing to offset the reduction in competition. Empirical results show that interline fares are between 20--28 percent lower for allied carriers as compared to non-allied carriers. This result is extremely robust to the specification and estimation technique. Results also show that fares in gateway markets are on average 4--6 percent higher for each additional alliance, but these results are not significant at standard levels. The second chapter estimates the potential impact of domestic airline alliances on consumer welfare. Consumers traveling on interline flights are likely to benefit from the formation of alliances, but allowing major domestic carriers to ally may reduce the incentives to compete over other routes where a vast major of domestic travel occurs. A regression model estimates the marginal effects of various competition-related variables on fares and uses these results to infer the potential impact of an alliance. All three proposed domestic alliances are found to have large negative impacts on consumer surplus. For the third quarter of 1997, the loss for Northwest/Continental is predicted to be $27 million, the loss for American/USAir, $47 million, and the loss for United/Delta, $57 million.
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