Airline Code-Share Alliances and Costs: Imposing Concavity on Translog Cost Function Estimation
26 Pages Posted: 15 Sep 2003
Date Written: August 4, 2003
Abstract
This paper provides an assessment of the how airline code-share alliances affect the costs of the airline industry. It makes two contributions to the literature. First, it measures the effects of airline alliances by estimating a translog cost function using a panel dataset of ten major U.S.-based airlines over 29 quarters. Secondly, it ensures concavity of the estimated cost function by using the procedure suggested by Ryan and Wales (2000). A conventional translog cost function is first estimated and the usual elasticities and scale estimates are computed. Unfortunately, the estimated function fails the curvature requirement, which makes interpreting the estimated effects of alliances somewhat dubious. Hence, we re-estimate the cost function by imposing the local concavity restrictions. We find that alliances have a negative effects on airlines' costs, but the magnitude appears small. When compared with estimates obtained earlier, we find material differences exist with the imposition of local concavity.
Keywords: Airline Alliances, costs, translog, concavity
JEL Classification: L00, L12, L93
Suggested Citation: Suggested Citation