Airline alliances and entry deterrence

This paper investigates the role of code-sharing alliances on entry deterrence. One major carrier operates a network with one hub that links n cities. It competes with another foreign carrier on one international spoke, while the other spokes are domestic and monopolized. There exists a potential entrant on one of the domestic spokes. We demonstrate that entry may increase or decrease the major carrier’s profits, depending on the network size and the degree of product differentiation. When entry decreases the profits, an alliance between incumbents can be used as a credible threat to deter entrants with no significant cost advantage.