Essays on airline economics

Code-sharing is an agreement between two (or three, in one case) carriers, in which one carrier (the operating carrier) allows another carrier (its code-share partner, the marketing carrier) to market and sell seats on some of the operating carrier's flights under the marketing carrier's reservation code. When a proposal of code-sharing between two major airlines is initiated, a debate often ensues between the policy-makers (U.S. Department of Justice) and carriers. The U.S. Department of Justice hesitates to approve such proposals due to concerns that these agreements may reduce competition and hence induce a loss of consumer welfare, given the fact that potential code-sharing partners already have high market shares. However, carriers have claimed that passengers benefit from code-sharing since it provides more product choices and destinations.;My dissertation analyzes the competitive effects of code-sharing. The first chapter is a reduced-form analysis of competitive effects. I found code-shared products are priced significantly lower. I conjecture that product differentiation allows airlines to price discriminate consumers. The second chapter is then a structural analysis considering both consumer demand and firms' costs and markups (for both code-shared and non code-shared products) to investigate price discrimination. I found that even airlines who are in a code-sharing partnership compete with each other, as is reflected in their competitive pricing strategies, including but not restricted to the use of second degree price discrimination. The economies of code-sharing reduce marginal cost, and firms are able to price at higher markups. Consumers benefit from quality variety even though code-shared flights have lower quality compared to non-codeshared ones. This implies that demand increases and consumers have large total surplus if code shared products are regarded as different products from non-code shared flights. The third chapter investigates the competitive price effects of the CO-NW-DL three-way code-sharing. I analyze how pricing changes after the merger between two code-share partners (DL and NW), and compare this to the competitive price effects after code-sharing.