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On The Choice between Strategic Alliance and Merger in the Airline Sector: The Role of Strategic Effects

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  • Philippe Barla
  • Christos Constantatos
Abstract
We consider a market with three competitors, two of which decide to cooperate. Firms first choose capacity under demand uncertainty, then compete in quantities after the uncertainty has been resolved. We specify strategic alliance (SA) as an agreement where two airlines jointly choose capacity and divide it among themselves. Contrary to the full merger case, after demand is revealed the alliance members market their capacity shares independently. Our contribution is twofold. First, we extend the well known Salant et al. (1983) result to the case of strategic alliance, that forming an alliance is not profitable unless cooperation leads to cost synergies. Second, we find that the profit of the cooperating firms is greater under SA than under full merger. These results imply that the SA always requires less cost saving than the merger in order to be profitable. © 2006 LSE and the University of Bath

Suggested Citation

  • Philippe Barla & Christos Constantatos, 2006. "On The Choice between Strategic Alliance and Merger in the Airline Sector: The Role of Strategic Effects," Journal of Transport Economics and Policy, University of Bath, vol. 40(3), pages 409-424, September.
    • Handle: RePEc:tpe:jtecpo:v:40:y:2006:i:3:p:409-424
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    References listed on IDEAS

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    1. Morasch, Karl, 2000. "Strategic alliances as Stackelberg cartels - concept and equilibrium alliance structure," International Journal of Industrial Organization, Elsevier, vol. 18(2), pages 257-282, February.
    2. Chen, Zhiqi & Ross, Thomas W., 2003. "Cooperating upstream while competing downstream: a theory of input joint ventures," International Journal of Industrial Organization, Elsevier, vol. 21(3), pages 381-397, March.
    3. Ming Hsin Lin, 2005. "Alliances and entry in a simple airline network," Economics Bulletin, AccessEcon, vol. 12(4), pages 1-11.
    4. Stephen W. Salant & Sheldon Switzer & Robert J. Reynolds, 1983. "Losses From Horizontal Merger: The Effects of an Exogenous Change in Industry Structure on Cournot-Nash Equilibrium," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 98(2), pages 185-199.
    5. Lin, Ming Hsin, 2004. "Strategic airline alliances and endogenous Stackelberg equilibria," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 40(5), pages 357-384, September.
    6. repec:ebl:ecbull:v:12:y:2005:i:4:p:1-11 is not listed on IDEAS
    7. Brueckner, Jan K., 2001. "The economics of international codesharing: an analysis of airline alliances," International Journal of Industrial Organization, Elsevier, vol. 19(10), pages 1475-1498, December.
    8. Barla, Philippe & Constantatos, Christos, 2000. "Airline network structure under demand uncertainty," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 36(3), pages 173-180, September.
    9. Barla, Philippe & Constantatos, Christos, 2005. "Strategic interactions and airline network morphology under demand uncertainty," European Economic Review, Elsevier, vol. 49(3), pages 703-716, April.
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    Cited by:

    1. Brueckner, Jan K. & Proost, Stef, 2010. "Carve-outs under airline antitrust immunity," International Journal of Industrial Organization, Elsevier, vol. 28(6), pages 657-668, November.
    2. 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.
    3. Volodymyr Bilotkach, 2019. "Airline Partnerships, Antitrust Immunity, and Joint Ventures: What We Know and What I Think We Would Like to Know," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 54(1), pages 37-60, February.
    4. Chun, So Yeon & Kleywegt, Anton J & Shapiro, Alexander, 2011. "Revenue management in resource exchange seller alliances," MPRA Paper 34657, University Library of Munich, Germany.
    5. Bilotkach, Volodymyr & Hüschelrath, Kai, 2019. "Balancing competition and cooperation: Evidence from transatlantic airline markets," Transportation Research Part A: Policy and Practice, Elsevier, vol. 120(C), pages 1-16.
    6. Kawamori, Tomohiko & Lin, Ming Hsin, 2013. "Airline mergers with low cost carriers," Economics of Transportation, Elsevier, vol. 2(2), pages 63-71.
    7. Bilotkach, Volodymyr & Hüschelrath, Kai, 2012. "Airline alliances and antitrust policy: The role of efficiencies," Journal of Air Transport Management, Elsevier, vol. 21(C), pages 76-84.
    8. Button, Kenneth & Porta, Flavio & Scotti, Davide, 2020. "The role of strategic airline alliances in Africa," MPRA Paper 108265, University Library of Munich, Germany.
    9. Dominik Boniecki & Elzbieta Marciszewska, 2021. "Non-Cooperative Game Theory in Measuring Strategic Interactions between Airline Joint-Venture Alliances," European Research Studies Journal, European Research Studies Journal, vol. 0(2), pages 152-164.

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    More about this item

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L24 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Contracting Out; Joint Ventures
    • L93 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Air Transportation

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