In this paper, Econic Partners experts Mark Israel, Dan O’Brien, and Josephine Xu identify a pro-competitive benefit of alliances in yield management industries (e.g., airlines) that has been largely overlooked in economic literature.
The authors demonstrate that, under certain market conditions, these contracts create a joint incentive for competitors to expand capacity, ultimately increasing both output and consumer welfare. Using the American Airlines-JetBlue “Northeast Alliance” as a case study, the paper shows how revenue sharing can be used to incentivize capacity expansion, rather than restritiction.
The views and opinions expressed in this article are those of the authors and do not necessarily reflect the views of Econic Partners or its clients.
Abstract:
Two airlines in a market with three or four meaningful competitors propose an alliance that will share revenues. Imagine (in contrast to the reality of many airline alliances) that there are no cognizable efficiencies from complementary route structures, joint marketing, or other operational synergies. Even in such a case, should competition authorities automatically treat the arrangement as “merger-like” and presume harm? In this paper, we explain why no such presumption is warranted.
The conventional view is that a revenue-sharing alliance between horizontal competitors in a concentrated market is effectively a partial merger: it internalizes competitive externalities and therefore softens competition, absent efficiencies. That logic is incomplete—and thus insufficient to support a presumption of harm—in yield-management industries (e.g., airlines, hotels, car rentals, entertainment, and other settings where firms choose capacity well before prices) because it ignores a distinct and potentially procompetitive motive for alliance contracts. When firms compete in capacities (Cournot-style), two rivals who face additional competitors can have a joint incentive to use a legally enforceable, observable alliance contract to commit to expand capacity. By committing to expand, the partners can intensify competition against non-partner rivals, raising total output and consumer welfare.
Read the full article: Broader audience version here and the technical version here.
This article was first published in SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=6271201 and https://papers.ssrn.com/sol3/papers.cfm?abstract_id=6272898
