Airline Code-Share Alliances and Costs: Imposing Concavity on Translog Cost Function Estimation

26 Pages Posted: 15 Sep 2003

See all articles by Chew Lian (Michael) Chua

Chew Lian (Michael) Chua

School of Economics, University of Nottingham Ningbo China

Hsein Kew

Monash University - Department of Econometrics & Business Statistics

Jongsay Yong

University of Melbourne - Melbourne Institute: Applied Economic & Social Research

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

Chua, Chew Lian and Kew, Hsein and Yong, Jongsay, Airline Code-Share Alliances and Costs: Imposing Concavity on Translog Cost Function Estimation (August 4, 2003). Available at SSRN: https://ssrn.com/abstract=431960 or http://dx.doi.org/10.2139/ssrn.431960

Chew Lian Chua

School of Economics, University of Nottingham Ningbo China ( email )

199 Taikang East Road
Ningbo, 315100
China

Hsein Kew

Monash University - Department of Econometrics & Business Statistics ( email )

26 Sir John Monash Drive
Caulfield East, 3145, Victoria
Australia

Jongsay Yong (Contact Author)

University of Melbourne - Melbourne Institute: Applied Economic & Social Research ( email )

Level 5, FBE Building, 111 Barry Street
Parkville, Victoria 3010
Australia
+613-83445354 (Phone)
+613-83445630 (Fax)

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