Thursday, November 10, 2011

Partnering with Competitors - An Empirical Analysis of Airline Alliances and Multimarket Competition
INSEAD Working Paper 2011/114/TOM/ACGRE revised version of 2011/24/TOM/ACGRE

Competition has become an important theme in the operations management literature and, according to recent theoretical and empirical work, the key finding is that firms tend to overstock or overproduce under competition. Following this prediction, one would expect that, after airlines start a multifaceted collaboration by forming an alliance, their networks would be consolidated and capacity redundancies would be eliminated, as intensity of competition decreases among alliance partners. Surprisingly, we find exactly the opposite: in the post-alliance era, alliance partners seek to overlap their networks more and they increase capacities on the markets in which two partners are already present. At the same time, average prices in those markets increase by about $11 per one-way segment coupon. We explain these results using predictions based on the theory of multimarket competition: as firms seek out opportunities to establish multimarket contact to strengthen mutual forbearance, they have incentives to increase overlap even though this decision may not seem optimal or efficient locally or in the short term. We examine other plausible competing mechanisms built on theories of capacity and service competition and commonly cited benefits of airline alliances but ultimately we conclude that our findings are most likely driven by the multimarket competition. This paper therefore underscores the importance of going beyond simple bilateral competition models whose predictions may not hold when firms compete operationally in multiple markets, a phenomenon which is widespread in many operations-intensive industries.