Working Paper: CEPR ID: DP5063
Authors: Philippe Gagnepain; Pedro L. Marn
Abstract: We consider an empirical model of worldwide airlines? alliances that we apply to a large set of companies for the period 1995-2000, with special attention to US and EU carriers. From the estimation of a cost, capacity and demand system that accounts for cross-price elasticities, we attempt to shed light on several interesting issues: First, we analyse whether alliance members? networks are complements or substitutes. Second, we construct price-cost margins and test several hypothesis of non-cooperative behaviour such as individual Nash and joint price setting within the alliance. We suggest that current alliances' pricing habits are not uniform and range from individual Nash to more competitive behaviours.
Keywords: airline alliances; cross-price elasticities; Nash behavior
JEL Codes: L11; L13; L41; L93
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Airline alliance networks act as complements (D85) | Lower prices and costs (L11) |
| Airline alliance networks act as substitutes (D85) | Higher prices due to reduced competition (D49) |
| Airline alliance membership influences pricing strategies (L11) | Average price-cost margin differs significantly (L11) |
| Joint pricing behavior within alliances is more prevalent (L11) | Individual Nash pricing behavior (D43) |
| Cross-price elasticities indicate competitive dynamics (D40) | Nature of alliances influences pricing behaviors (L14) |