Download this Paper Open PDF in Browser

Partnering with Competitors - An Empirical Analysis of Airline Alliances and Multimarket Competition

37 Pages Posted: 14 Feb 2011 Last revised: 10 Nov 2011

Jun Li

University of Michigan, Stephen M. Ross School of Business

Serguei Netessine

The Wharton School, University of Pennsylvania

Date Written: November 10, 2011

Abstract

Competition has become an important theme in the operations management literature and, according to recent theoretical and empirical work, the key finding is that firms tend to overstock or overproduce under competition. Following this prediction, one would expect that, after airlines start a multifaceted collaboration by forming an alliance, their networks would be consolidated and capacity redundancies would be eliminated, as intensity of competition decreases among alliance partners. Surprisingly, we find exactly the opposite: in the post-alliance era, alliance partners seek to overlap their networks more and they increase capacities on the markets in which two partners are already present. At the same time, average prices in those markets increase by about $11 per one-way segment coupon. We explain these results using predictions based on the theory of multimarket competition: as firms seek out opportunities to establish multimarket contact to strengthen mutual forbearance, they have incentives to increase overlap even though this decision may not seem optimal or efficient locally or in the short term. We examine other plausible competing mechanisms built on theories of capacity and service competition and commonly cited benefits of airline alliances but ultimately we conclude that our findings are most likely driven by the multimarket competition. This paper therefore underscores the importance of going beyond simple bilateral competition models whose predictions may not hold when firms compete operationally in multiple markets, a phenomenon which is widespread in many operations-intensive industries.

Suggested Citation

Li, Jun and Netessine, Serguei, Partnering with Competitors - An Empirical Analysis of Airline Alliances and Multimarket Competition (November 10, 2011). INSEAD Working Paper No. 2011/114/TOM/ACGRE. Available at SSRN: https://ssrn.com/abstract=1761211 or http://dx.doi.org/10.2139/ssrn.1761211

Jun Li

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

Serguei Netessine (Contact Author)

The Wharton School, University of Pennsylvania ( email )

SH-DH 1332B
Philadelphia, PA 19104-6367
United States
(215) 573 3571 (Phone)
(215) 898 3660 (Fax)

HOME PAGE: http://www.netessine.com

Paper statistics

Downloads
397
Rank
60,659
Abstract Views
1,599