Empirical Analysis of the Codeshare Effect on Airline Market Competition and Product Quality

Abstract

This paper examines the economic consequences of code-sharing agreements (CSA) in the airline market. CSA can be viewed as a vertical contract between airlines, which sometimes co-own the code-shared flights. Our structural model aims to understand how and to what extent CSA distorts market competition among airlines. With an application to Japanese domestic airlines, structural estimates of our demand and supply models indicate that CSA would significantly lessen market competition, by sharing increased revenues from raised fares. We further extend our model to consider endogenous product quality. Although the loss of consumer welfare due to CSA is alleviated by enhanced product quality, the anti-competitive effect of CSA is persistent.

Keywords: airline industry, horizontal merger, structural estimation

JEL Classification: L11, L13, L93, L41, C51