Vertical contracting between airlines: An equilibrium analysis of codeshare alliances

This paper studies the competitive effects of airline codeshare alliances. We consider an airline market with two firms offering two differentiated final products: a direct flight and an indirect flight between two destinations. An intermediate (complementary) flight is needed to complete the indirect flight. When the intermediate flight is offered only by a third airline, codesharing between the two complementary airlines eliminates double markup and lowers consumer prices. When the intermediate flight is offered only by the airline that also offers the direct flight, codesharing does not eliminate the double markup, but, interestingly, it again lowers final prices for consumers. However, if both the third and the direct flight airlines can offer the intermediate flight, then allowing codesharing leads to the exclusion of the third airline and to higher consumer prices.