A Panel Data Analysis of Code Sharing, Antitrust Immunity and Open Skies. Treaties in International Aviation Markets. W. Tom Whalen 1.

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1 A Panl Data Analyss of Cod Sharng, Anttrust Immunty and Opn Sks Trats n Intrnatonal Avaton Markts by W. Tom Whaln May 6, 2005 Abstract Ths papr stmats th ffcts of cod sharng, anttrust mmunty and Opn Sks trats on prcs, output and capacty usng an lvn-yar panl of U.S.-Europ data. Cod sharng and mmunzd allancs ar found to hav sgnfcantly lowr prcs than tradtonal ntrln (multcarrr) srvc, but th ffcts ar smallr n magntud than prvous rsults that rly on cross sctonal data. Statstcal tsts that prcs for mmunzd allanc srvc ar qual to onln (sngl carrr) srvc oftn cannot b rjctd, provdng addtonal vdnc that mmunty grants allow mmunzd carrrs to ntrnalz a doubl margnalzaton problm. Estmatd output ffcts, consstnt wth th prc ffcts, show that allancs ar assocatd wth larg ncrass n passngr volums. Lastly, th rlatonshp btwn mmunty grants and Opn Sks trats s xplord. Estmats suggst that capacty xpansons assocatd wth Opn Sks ar du ntrly to xpanson by mmunzd carrrs on routs btwn thr hubs. Th rsults ar robust to attmpts to control for potntal bas from changs n th mx of busnss and lsur passngrs. Kywords: Arln Allancs, Anttrust Immunty, Cod Sharng, Opn Sks Trats JEL Cods: L, L24, L40, L93 Anttrust Dvson, US Dpartmnt of Justc, Economc Analyss Group; 600 E Strt NW; Sut 0000; Washngton, DC E-mal: Wllam.Whaln@usdoj.gov. Th vws xprssd n ths papr do not rflct thos of th US Dpartmnt of Justc. All rrors ar my own.

2 I. Introducton In racton to sgnfcant ncrass n dmand for ntrnatonal ar travl ovr th last dcad, U.S. arlns hav forgd stratgc allancs wth thr ovrsas countrparts to xtnd th rach of thr hub-and-spok ntworks. Bcaus of scop and scal conoms and th thnnss of ntrnatonal routs, carrrs gnrally only provd nonstop srvc on ovrsas routs btwn thr hubs and th largst ntrnatonal cts. 2 Thus, srvc to any dstnaton byond ths larg hub cts rqurs that th carrr put passngrs on forgn carrrs for part of thr tnrars. Wth an allanc, multpl carrr or ntrln srvc mmcs sngl carrr or onln srvc, and th allanc partnrs clam consumrs can rap all of th scop and scal bnfts assocatd wth onln srvc. Thos bnfts nclud ntgratd frqunt flr programs, coordnatd schduls to rduc layovrs, ncrasd frquncs and th ablty to chck luggag through to th fnal dstnaton. 3 Ths allancs can tak many dffrnt forms dpndng on th dgr of ntgraton btwn th carrrs, but thr ar two prvalnt typs: cod sharng allancs and anttrust mmunzd allancs. Cod sharng allows th partnrs to put thr carrr dsgnator cod on ach othr s flghts, whch facltats marktng tckts whr at last a porton of th flght s opratd by th partnr. Th most common form of cod sharng allows a carrr rlatvly opn accss hs partnr s capacty at a fxd prc pr passngr (condtonal on tckt rstrctons) that s 2 Evn wth lbralzd avaton trats, so calld Opn Sks, prohbtons on cabotag would prvnt th forgn carrr from opratng a sgmnt wthn anothr country and nsuffcnt dmand wll prvnt a carrr from opratng nonstop srvc from hs hom country to many modrat or small szd ntrnatonal cts. 3 Whl th ntworks of carrrs n an ntrnatonal allanc ar gnrally complmntary, thr ar usually svral, oftn dnsly travld, routs whr th carrrs provd substtut srvc. Comptton on ths routs could b rducd by allancs, partcular ons mmunzd from th anttrust laws. Th focus of ths papr s on ffcts on th complmntary routs. Any wlfar analyss would nd to valuat th potntal harms as wll. 2

3 ngotatd n advanc (calld a prorat ). Thus, whn a carrr slls a tckt whr part of th tnrary s on a forgn carrr, t pays th prorat to that carrr. Cod sharng allancs ar somtms assocatd wth othr coopratv bhavor as wll. For xampl, th carrrs ar lkly to coordnat thr flght schduls to facltat connctons (much lk a sngl carrr schduls banks at ts hubs to mnmz layovr tms). In th absnc of a cod sharng agrmnt, whn a passngr must b put on a forgn carrr to rach hs fnal dstnaton, th prorat pad to th forgn carrr s dtrmnd at Intrnatonal Ar Transport Assocaton (IATA) tarff confrncs and subjct to approval of th rspctv govrnmnts. At th tarff confrncs, whch ar mmunzd from anttrust laws, carrrs collctvly st ntrln fars for thousands of markts. Carrrs ar not rqurd to charg th confrnc prc but ar rqurd to pay th othr carrrs a prorat as f th confrnc prc was chargd. 4 For a mor dtald dscrpton of IATA and ts rat makng rol s O Connor (2000). Bcaus ntrnatonal trats lmt forgn ownrshp n arlns and prvnt mrgrs, th most ntgratd rlatonshps possbl occur whn two carrrs ar grantd anttrust mmunty from th rlvant govrnmnt agncs. Wth mmunty, carrrs can ntgrat thr schdulng, prcng and yld managmnt systms and shar rvnus from th allanc. In th U.S., th Dpartmnt of Transportaton (DOT) has th authorty to grant anttrust mmunty and has don so frquntly, oftn n conjuncton wth mor lbralzd avaton blatral agrmnts ("Opn Sks" trats). Ths trats rplacd mor rstrctv blatrals and allowd carrrs to st schduls, capacty and prcs fr of govrnmnt rgulaton. Although trmd Opn Sks, ths trats do not allow 4 In practc, som vdnc suggsts that carrrs do not dvat from th confrnc prc vry oftn whn thy do not hav an allanc. S DG Comptton Consultaton Papr (200). 3

4 ntry by a forgn carrr nto th domstc markt (cabotag) nor do thy lft th cross ownrshp rstrctons that prvnt mrgrs btwn carrrs from dffrnt countrs. Immunty grants, though, allow carrrs to bhav as f thy wr mrgd and thus, allows thm to jontly prc routs and shar rvnu. Brucknr (200) and Brucknr and Whaln (2000) (hraftr B&W) argu that prcng wthout an allanc s smlar to carrrs ndpndntly choosng subfars for thr rspctv porton of th tnrary, takng as gvn th subfar chargd by th othr carrr. If th carrrs hav markt powr ovr thr portons of th tnrary, ths non-coopratv prcng gnrats a doubl margnalzaton problm bcaus nthr carrr consdrs what ffct sttng a hgh subfar has on th rvnu of th othr carrr. In othr words, a carrr sts th subfars that all othr carrrs pay for bookng a passngr on hs flghts at too hgh a lvl. Jont profts would rs and prcs would fall f th carrrs would lowr thr subfars. Th ffcnt outcom would hav on carrr charg margnal cost for ts porton of th tnrary to lowr th ovrall prc and stmulat addtonal dmand, but wthout som mchansm for compnsatng th carrr who chargs margnal cost, t has no ncntv to do so. Morovr, B&W and Brucknr argu that whn ths carrrs hav an allanc (not dffrntatng btwn cod sharng and mmunzd allancs), thy jontly st prc and shar rvnus. Th ablty to shar rvnus allows th carrrs to ntrnalz th doubl margnalzaton problm and rsults n lowr prcs. In mprcal tsts usng a cross scton of data from 997, B&W fnd that ntrln fars on carrrs wth allancs (cod sharng or mmunty) ar on avrag 25% blow fars chargd by non-allanc ntrln pars. Brucknr (2003) xpands ths analyss and fnds, usng a cross scton of data from 999, that carrrs wth cod sharng agrmnts charg fars 8 to 7% blow tradtonal ntrln pars 4

5 and that fars on carrr wth anttrust mmunty ar 7 to 30% lowr. Brucknr argus that, whl cod sharng rsmbls th non-coopratv far sttng n th modl, t should rsult n lowr fars than th IATA procss bcaus th ngotatons ar blatral and not multlatral n natur. Thus, carrrs wth prfrncs for lowr prcs may los out to carrrs who prfr hghr ons n IATA ngotatons but could obtan lowr prcs n a blatral ngotaton. Ths papr xpands on th prvous mprcal rsults n svral ways. Frst, t maks us of a larg data st that covrs yars of ntrnatonal traffc btwn th U.S. and Europ. Prvous rsarch has rld on cross sctonal varaton, masurng th prc ffct rlatv to non-allanc carrrs for a gvn quartr, whl ths data st covrs th formaton and, n som cass, trmnaton of most major U.S.-Europan carrr allancs to dat. In gnral, th allanc prc ffcts stmatd n prvous work ar robust to th bttr data, though th ffcts n ths papr ar somwhat smallr. Immunty grants ar assocatd wth fars 4 to 22% lowr than tradtonal ntrln and cod sharng fars ar 5 to 0% lowr. In addton, all ls qual, mmunzd allanc fars ar oftn statstcally dntcal to onln fars. Bcaus onln fars cannot b affctd by doubl margnalzaton, ths rsult s consstnt wth th hypothss that th prmary ffct of th allanc s an ntrnalzaton of ths dmand xtrnalty. In addton, ths papr stmats th ffct ths allancs hav on output and, consstnt wth th prc ffcts, fnds that output rss sgnfcantly. Immunzd allancs ar assocatd wth output 5-88% hghr than tradtonal ntrln srvc whl cod sharng s 22-45% hghr. Both th prc and output rsults ar robust to dffrnt data sts that attmpt to control for so calld mx ffcts, that changs n th mx of busnss and lsur traffc could xplan som of th obsrvd ffcts from allancs. Ths papr dos not fnd that mx ffcts consstntly undr or ovr stat th ffct of allancs. Lastly, ths papr nvstgats th proposton that th bnfts 5

6 from mmunzd allancs ar smply a byproduct of Opn Sks trats, whch oftn occur n conjuncton wth grants of mmunty. Th rsults ar nconsstnt wth ths hypothss, but rgrssons suggst that capacty ncrass btwn countrs wth Opn Sks trats ar du ntrly to xpanson of mmunzd allancs on routs btwn thr hubs. Although th ltratur on ntrnatonal arln allancs s spars, a rvw of work not mntond prvously s worthwhl. A thortcal modl by Park (997) prdctd that comptton n som markts producd an xtrnalty n othr markts for allanc partnrs, whch ld to an ncras n wlfar for allancs wth complmntary rout structurs but a dcras for allancs whos rout structurs ovrlappd. Park and Zhang (998) dvlopd a thortcal modl that suggsts allancs ncras traffc on gatway-to-gatway routs and found mprcal support for th hypothss usng data on transatlantc traffc. Oum, Park and Zhang (996) stmatd th ffcts of cod sharng agrmnts btwn non-markt ladrs on th prc and output of th markt ladr and found usng publshd prcs that cod sharng on non-markt ladrs causd th ladr s prc to fall and output to rs. Smlarly, Park and Zhang (2000) nvstgatd ffcts on fars and output for four transatlantc allancs usng publshd far data and sgmnt passngrs, fndng that prcs fll and output ros. Hassn and Shy (2004) modld th ffcts of cod sharng n markts whr on carrr can offr onln srvc but th othr must cod shar on th compttor. Thy found that th cod sharng agrmnt s Parto mprovng. Hassn and Shy (2000) modld th ffcts of cod sharng n markts whr th allanc partnrs compt, ndognzng th choc of flght frquncy. Ths modl prdcts that whl th allanc rass flght frquncy, t rass prcs and lowrs passngr wlfar. Fnally, Blotkach (2004) dvlopd a dffrntatd Brtrand modl of allancs whr consumrs hav prfrncs for fwr stops. Th modl prdcts that allancs wthout mmunty produc th sam bnfts to 6

7 ntrln passngrs as thos wth t and that th addton of mmunty srvs only to ras fars n th hub-to-hub markts whr allanc partnrs prvously comptd. Thr s also a growng ltratur on th ffcts of domstc cod sharng allancs. Bambrgr, Carlton and Numann (2004) and Ito and L (2004) found that domstc allancs gnrally bnftd consumrs. Armantr and Rchard (2005b) found htrognous ffcts across dffrnt typs of markts n th Northwst-Contnntal allanc. Whaln (2005) found htrognous ffcts across dffrnt domstc allancs. Armantr and Rchard (2005a) usd a dscrt choc modl to stmat th ffcts of th Northwst-Contnntal allanc and found that pr passngr consumr surplus fll. Whaln (999) found that th potntal bnfts from convrtng ntrln passngrs to onln wr small rlatv to th potntal antcompttv ffcts of domstc allancs. Ths papr s organzd as follows. Scton two dscusss ntrnatonal arln allanc prcng thory. Scton thr dscusss th constructon of th data st and provds background on xstng allancs. Scton four prsnts som summary statstcs and rgrsson rsults. Sctons fv prsnts som addtonal analyss of mmunty grants and Opn Sks trats. And th fnal scton offrs som concludng rmarks. II. Allanc Prcng Thory B&W and Brucknr prsnt modls of th ffct of ntrnatonal allancs. Ths modls ar structurd wth a st of routs n on country that ar srvd by carrrs n that country and a st n anothr country srvd by dffrnt carrrs. Passngrs wshng to travl from dstnatons n on country to thos n th othr ar forcd to us th srvcs of two carrrs. Th prcs for 7

8 ths tnrars n th absnc of an allanc ar st n a non-coopratv fashon. Each carrr chooss a subfar for th porton of th tnrary t oprats takng as gvn th subfar chosn by th othr carrr. Th passngr thn pays th sum of th subfars for th ntr tnrary. To th xtnt that carrrs n ach country hav som markt powr, both carrrs wll markup thr subfars abov margnal cost, and bcaus ach carrr taks th othr s subfar as gvn n ts optmzaton problm, th carrrs ssntally apply thr markup on top of th markup appld by th othr carrr. Ths ntroducs a doubl margnalzaton problm and rsults n prcs that ar nffcntly too hgh. It s straghtforward to s how ths problm arss. Suppos for smplcty that thr s a monopolst for srvc n ach country. Dmand for tnrars rqurng both carrrs s a functon of th sum of th subfars,.. Q D s + s ) whr s and s 2 ar th subfars for carrrs and 2 ( 2 rspctvly. Each carrr thn maxmzs th proft functon, π c) D( s s ), whr c s a ( s + 2 constant margnal cost and taks th valus and 2 to rprsnt th two carrrs. 5 Th prc pad by th passngr s P s + s2. Th frst ordr condton for carrr s dp s + Q c. dq () Assumng symmtry btwn carrr and carrr 2, th prc pad by th passngr s found by multplyng quaton () by 2 and rplacng 2s wth P. Spcfcally, dp dp 2s + 2Q 2c P + Q c. dq 2 dq (2) If, on th othr hand, th rout was srvd by a sngl carrr (onln srvc) or carrrs wth an 5 Constant margnal cost s assumd for smplcty. Brucknr and B&W ncorporat conoms of dnsty nto th cost functon. 8

9 mmunzd allanc who can jontly st prc and shar profts, th carrr(s) would maxmz th proft functon π ( P c) Q( P), whch s th standard monopolst s problm. Th frst ordr condton of that maxmzaton s dp P + Q c. dq (3) Equatons (2) and (3) dffr only n th ½ that appars bfor prc n th non-allanc quaton (2). Notc that bcaus dp Q s ngatv, th prc that satsfs quaton (2) s largr dq than th prc that satsfs (3) for any gvn Q. Furthrmor, bcaus th prc that satsfs quaton (3) maxmzs profts wthout th addtonal constrant of th othr carrr s subfar, th hghr non-allanc prc not only maks passngrs wors off, but also rsults n lowr profts for th carrrs. 6 Ths modls mply that, all ls qual, thr s an ffcnt prc sttng mchansm n onln or mmunzd prcng, and an nffcnt mchansm n non-allanc ntrln prcng, but ths modl do not gvn much gudanc for th prcng bhavor of cod sharng agrmnts. Bcaus non-allanc ntrlnng rls on prcs st at multlatral IATA ngotatons, Dogans and Brucknr suggst that cod sharng may rsult n lowr fars smply bcaus t allows carrrs wth prfrncs for lowr prcs to brak out of th multlatral ngotatons and st ndvdualzd prcs. Thus whl thr prcs ar stll nffcnt from th doubl margnalzaton problm, thy ar lowr than tradtonal ntrlnng bcaus thy arss from blatral and not multlatral ngotatons. 6 Nonlnar contractng could also solv th doubl margnalzaton problm, but arlns gnrally sm unwllng to ntr contracts that mght rsmbl proft sharng. Bcaus th ntworks of ths arlns ar complmntary on som routs and substtuts on othrs, thy may far anttrust acton from such contracts. 9

10 III. Th Data Th data usd for th mprcal analyss com n part from th DOT s quartrly Orgn and Dstnaton Survy, DBA and DBB, (hncforth calld th O&D data ). Ths data ar a 0% sampl of all traffc thr tcktd by U.S. carrrs or whr a U.S. carrr opratd at last on of th sgmnts. Each obsrvaton n th O&D data contans th far, th orgn, dstnaton and connctng arports, th carrr opratng ach sgmnt and th numbr of sampld passngrs travlng th tnrary at a partcular far. Ths analyss uss data for th thrd quartr of vry yar from 990 through Bcaus most of th allancs--partcularly thos wth anttrust mmunty--wr formd btwn U.S. and Europan carrrs, th data ar rstrctd to U.S.-Europ traffc. Svral adjustmnts wr mad to th data to corrct for data problms and allow for rgrsson analyss. Th majorty of ths changs ar dtald n appndx A, but th craton of th data st s outlnd hr to gv th radr a sns for what th data look lk. Frst, th raw data ar a mx of round trp and on-way obsrvatons. Round trp tnrars wr brokn nto thr on-way componnts and on half of th far was appld to ach drcton. Scond, n ordr to facltat comparng fars for carrrs wth allancs to fars of thr nonallanc partnrs or sngl carrr tnrars, tnrars wth mor than two carrrs wr lmnatd. A rlatvly small numbr of passngrs travl on tnrars wth thr or mor carrrs and a vsual nspcton of th data suggsts many of thos lkly nvolv rportng rrors. 7 Arln data ar xtrmly sasonal. Rathr than try to control for that sasonalty n th rgrsson analyss, ths papr rls only on thrd quartr data. Ths quartr s th pak travl sason, so th data ar rch wth busnss and lsur traffc. 0

11 Th data wr thn aggrgatd n two dffrnt ways to crat th rgrsson data sts usd n th analyss. Th frst approach aggrgatd th data to th rout-carrr lvl. Each obsrvaton n ths data st s unqu to th orgn-dstnaton par and th carrr or carrr par. Thus, ach orgn-dstnaton par wll hav multpl obsrvatons f mor than on carrr or carrr par offrd srvc on that rout. For xampl, thr may b multpl obsrvatons for passngrs travlng from Mlwauk to Brln (for a gvn quartr): on for passngrs travlng on Untd Arlns onln srvc, anothr for thos travlng on Untd and Lufthansa ntrln srvc, and yt anothr for thos travlng on Amrcan and Swss Ar. 8 Th scond mthod aggrgatd th data to th orgn-dstnaton lvl (th rout data st). Contnung wth th sam xampl, n ths data st, thr s only on obsrvaton (for a gvn quartr) for th Mlwauk-Brln rout that s aggrgatd across all carrrs. Byond just a chck on robustnss n gnral, stmatng th modl for both data sts provds a tst for whthr th far ffcts from allancs ar du at last partly to changs n th passngr mx btwn carrrs wthn a rout. For xampl, f thr s a dsproportonat shft of low far passngrs to allanc carrrs rlatv to hgh far passngrs, avrag fars on non-allanc carrrs n th rout-carrr data st would rs whl avrag fars on allanc carrrs would fall. Ths ffcts would not rflct a chang n prcng by th carrrs, only a chang n th mx of hgh and low far passngrs. Thus, rgrsson rsults usng th routcarrr data st could ovrstat th ffct of th allanc. Convrsly, a dsproportonat shft of hgh far passngrs could lad to an undrstatmnt of th allanc ffcts. Bcaus th rout data st aggrgats across all carrrs on a rout, th avrag far s nvarant to changs n passngr 8 A carrr can appar n svral obsrvatons n th rout-carrr data st: onc by tslf for onln srvc and thn a numbr of tms as a part of dffrnt pars. For xampl, on a partcular rout, Untd could appar n an obsrvaton for onln srvc and thn appar n addtonal obsrvatons as a Untd-Lufthansa par, a Untd-SAS par, tc.

12 mx btwn carrrs and thus, should corrct for ths potntal problm. 9 Intrnatonal routs fall nto four basc catgors. Th frst catgory s gatway-to-gatway routs. Ths ar routs btwn U.S. and forgn gatway arports. Typcally, ths routs connct th hub of a U.S. carrr wth th hub of a Europan carrr, and thus, th carrrs potntally offr ovrlappng nonstop srvc. Bcaus th purpos of ths papr s to focuss on allanc ffcts n markts whr domstc and forgn carrrs can provd complmntary srvc, gatway-to-gatway markts wr lmnatd. Th scond catgory s gatway-to-byond routs. Ths ar routs btwn a U.S. gatway arport and a non-gatway forgn arport. A forgn carrr can offr onln srvc on ths routs, but a U.S. carrr can only offr srvc by ntrlnng wth a forgn carrr. Ths routs wr also lmnatd. Only U.S. carrrs fl data wth DOT, rportng thr onln srvc as wll as ntrln srvc thy provd jontly wth a forgn carrr. Bcaus forgn carrrs can srv gatway-to-byond routs on an onln bass, ths onln srvc wll not appar n th data and could bas th rsults of th stmaton. Th thrd catgory s bhnd-to-gatway routs. Ths ar routs btwn a non-gatway U.S. arport and a forgn gatway arport. In ths markts, a U.S. carrr may offr onln srvc, but forgn carrrs can only srv th rout n conjuncton wth a U.S. carrr. Bcaus all th srvc on ths routs s sampld by th DOT data, ths routs wr kpt. Fnally, thr ar bhnd-to-byond routs. Ths ar routs btwn two non-gatway arports whr only ntrln srvc (thr allanc or non-allanc) s possbl. Bcaus all th srvc s sampld by th DOT data, ths routs ar also kpt. Thus th data st contans two catgors of routs: bhnd-to-byond routs whr only ntrln srvc s possbl and bhnd-to-gatway 9 Th O&D contan no rlabl nformaton on tckt rstrctons. Thus, controllng for passngr mx xplctly n th rgrsson analyss s mpossbl. 2

13 routs whr ntrln srvc or U.S. carrr onln srvc s possbl. DOT T-00 Srvc Sgmnt data wr usd to dntfy ths catgors of markts. Th T-00 data rports th numbr of opratons, avalabl sats and onboard passngrs for ach sgmnt, ncludng ntrnatonal sgmnts that nclud a U.S. ndpont. Both forgn and U.S. carrrs rport ths data. 0 To guarant that both gatway-to-gatway and gatway-to-byond tnrars wr lmnatd, all markts wth a U.S. gatway ndpont wr droppd. U.S. gatway arports wr dfnd as thos arports wth at last on nonstop flght pr busnss day to a Europan arport. Ths rstrcton guarants that markts that could b srvd solly by forgn carrrs (and thus ar not obsrvabl n th O&D data) ar lmnatd. Data on allancs cam prmarly from Arln Busnss magazn s annual allanc survy, whch dntfs whn carrrs ntrd nto cod sharng agrmnts or mmunzd allancs. Ths nformaton was supplmntd n som nstancs wth othr mda sourcs and DOT prss rlass. Th agrmnts and thr ffctv dats ar lstd n Tabl. Thr wr 30 cod sharng agrmnts that appard n th data ovr ths lvn yar prod and ght grants of anttrust mmunty. Th frst major allanc was btwn Northwst Arlns and KLM and bgan n 989. Th arlns bgan cod sharng n 99 and wr th frst mmunzd allanc n 993. Whl most of th agrmnts, onc startd, contnud throughout th ntr sampl prod, sx of th cod sharng agrmnts wr trmnatd durng th sampl prod and thr of th mmunts. Th most notabl cod shar that was trmnatd was btwn USAr and Brtsh Arways, whch lastd from 993 to 996. Th allancs wth anttrust mmunty that wr trmnatd wr Dlta- 0 Pror to 998, forgn carrrs only rportd on-board passngrs to th DOT who thn usd OAG schdulng data to stmat th avalabl sats and frquncs of th forgn carrrs. Th T-00 data wr also usd to calculat numbr of opratons and avalabl sats on gatway-to-gatway markts for th 3

14 Swss Ar, Dlta-Sabna and Dlta-Austran Ar, whch Dlta trmnatd to pursu an allanc wth Ar Franc (whch was mmunzd n 200). Lastly, som xognous dmand sd charactrstcs wr addd to th data. U.S. Mtropoltan Statstcal Ara populatons and pr capta ncom wr addd basd on th locaton of th U.S. arport. Ths data com from th Burau of Economc Analyss. Europan country populatons and gross domstc product wr also addd basd on th locaton of th Europan arport. GDP was normalzd by th country populaton. Thos data com from th OECD. IV. Estmaton Stratgy and Rgrsson Rsults Summary Statstcs Th summary statstcs for both data sts ar prsntd n Tabl 2. Not surprsngly, thy ar smlar btwn th data sts. Dffrncs ar largly du to th fact that th rout-carrr data st wll gv mor wght to largr routs (bcaus t tnds to hav multpl obsrvatons for largr routs) whl th rout data st gvs mor wght to smallr routs. In th rout-carrr data, th avrag on-way far (Avg Far) s $697 and an tnrary has on avrag 2.6 coupon sgmnts (Avg Coup). Th avrag numbr of sampld passngrs n a quartr on ach rout (Mkt Pax) s 30.7, whch corrsponds to 307 actual passngrs (bcaus th data ar a 0% sampl). Each carrr or carrr-par on a rout carrs 6.4 sampld or 64 actual passngrs (Carrr Pax) on avrag. Dummy varabls ndcat whthr srvc was sngl carrr srvc (Onln), cod shar allanc srvc (CS) or mmunzd srvc (Immunty). 2 In th data st, 42% of th srvc analyss of th capacty ffcts of Opn Sks agrmnts. Ths s dscrbd n mor dtal n Scton V. 2 Carrrs wth cod sharng allanc do not cod shar on vry rout, but pror to 998, th DOT O&D data dd not dffrntat btwn passngrs travlng on cod shar tnrars and thos not. Thrfor, n ths work, th dummy for cod 4

15 s onln, 4% s mmunzd and 6% s cod sharng. Th xcludd catgory n th rgrssons to whch th ffcts ar masurd s non-allanc ntrln srvc, whch consttuts th rmanng 38%. Comptton n th markts s masurd usng a Hrfndahl-Hrschman ndx (HHI). Sparat HHI s wr calculatd for carrrs offrng onln or allanc srvc (HHI_Oa) from thos offrng just non-allanc ntrln srvc (HHI_Int). Th HHI_Oa s calculatd basd on th shar of passngrs carrd by ach carrr offrng onln or allanc srvc on th rout. For th purpos of calculatng shars, carrrs wth mmunzd allancs wr consdrd th sam carrr whl passngrs travlng on cod sharng allancs wr dvdd qually btwn th two carrrs. For xampl, suppos n a partcular markt, Untd carrs fv passngrs on an onln bass, th Untd-Lufthansa mmunzd allanc carrs two, and th Dlta-Ar Franc cod sharng allanc carrs thr. 3 Bcaus Untd and Lufthansa hav an mmunzd allanc, thy ar countd as a sngl carrr wth 70% of th markt (svn of th tn passngrs). Bcaus Dlta and Ar Franc hav only a cod sharng allanc, thy ar countd sparatly, and thr passngrs ar splt btwn thm. Thus, ach s countd as havng 5% of th markt (.5 passngrs ach). HHI_Int s calculatd usng carrrs who do not othrws offr onln or allanc srvc n th markt. For thos carrrs, th passngrs ar dvdd qually btwn thm to calculat shars. In gnral, th routs ar hghly concntratd wth an avrag HHI_Oa of 0.56 and HHI_Int of A dummy varabl was constructd to control for th ffcts of Opn Sks trats sharng ndcats whthr th two carrrs opratng th tnrary had a cod sharng allanc. 3 Although Dlta and Ar Franc hav an mmunzd allanc today, that allanc was not mmunzd untl 200, aftr th sampl prod. 5

16 (Opnsky). It taks a valu of on whn th Europan dstnaton was n a country wth whch th U.S. had an Opn Sks traty. 3% of th tnrars n th rout-carrr data st travld to countrs wth Opn Sks agrmnts. Summary statstcs for th rout data st ar vry smlar. Th avrag far s slghtly lowr at $679. Th numbr of sampld passngrs n a markt s 4, roughly half th numbr n th rout-carrr data. Bcaus th rout-carrr data has multpl obsrvatons on many dns routs, ths smply rflcts a knd of doubl countng of dnsr routs. Th masurs of concntraton ar also smlar btwn th data sts. In th rout data st, th HHI_Oa s 0.60 whl th HHI_Int s Bcaus th rout data s aggrgatd across carrrs (or carrr-pars), t s no longr possbl to us dummy varabls to ndcat th typ of srvc. Instad, ths varabls ar convrtd to th prcntag of passngrs travlng on ach typ of srvc on th rout. Th summary statstcs for ths varabls ar smlar to thos for th rout-carrr data st wth 48% of th traffc travlng on onln srvc (Pct Onln), 4% travlng on mmunzd allancs (Pct Immun), and 6% travlng on cod sharng allancs (Pct CS). Tabl 3 contans slctd mans by typ of srvc from th rout-carrr data st for just th thrd quartr of 996. Ths summary statstcs offr mor nsght nto th rlatonshp btwn prcs and th varous typs of srvc and ar consstnt wth many of th xpctatons. Frst, th hghst avrag far s for non-allanc ntrln tnrars at $923. Ths s substantally hghr than th avrag far for onln srvc, whch s $669. Th avrag mmunzd far at $722 s consdrably lowr than th non-allanc far but also somwhat hghr than th avrag onln far. Th avrag cod sharng far s vn hghr at $763, but stll sgnfcantly lowr than th non-allanc far. Output follows a smlar pattrn. Onln srvc, whch has th lowst avrag 6

17 far, has th hghst output wth 40 sampld passngrs n th quartr. Immunzd allancs ar scond wth 32 sampld passngrs. Cod sharng allancs and non-allanc ntrln ar roughly quvalnt wth 8 sampld passngrs. Othr charactrstcs lk avrag coupon sgmnts and HHI s also dffr btwn th typs. Whl thos ffcts wll b accountd for n th rgrsson analyss, th summary statstcs ar gnrally consstnt wth th xpctatons about fars and srvc. Th graph n Fgur maks th sam pont n a dffrnt way. It shows th avrag fars ovr tm for ach catgory of srvc: onln, mmunzd, cod sharng, and non-allanc ntrln. Th avrag fars for non-allanc ntrln srvc ar consstntly th hghst whl onln srvc s consstntly th lowst. Th gap btwn ths prcs s roughly $50-$200. Immunzd tnrars, whch bgn n 993, track vry closly to th onln fars, whch s consstnt wth th blf that mmunzd allanc prcng s dntcal to onln prcng. Cod sharng fars ar gnrally blow th non-allanc fars but hghr than mmunzd fars. Th rgrsson analyss wll hold othr factors constant and tst whthr ths rlatonshps contnu to hold. Estmaton Stratgy Svral fxd ffcts rgrssons wr stmatd to masur th prc and output ffcts of dffrnt typs of srvc. Th basc forms of th rgrsson quatons ar lstd blow whr DpVar s th avrag far n th prc rgrssons and th numbr of passngrs n th output rgrssons. Th frst quaton s for th rout-carrr data st whr th subscrpt rfrs to th carrr, m to th rout and t to th yar. Th scond quaton s for th rout data st whr, bcaus th data ar aggrgatd to th rout lvl, th subscrpt s droppd and svral varabls 7

18 ar transformd to prcntags as dscrbd abov. Th rout ffcts n both quatons ar dffrncd out usng fxd ffcts; thus, nvarant rout charactrstcs ovr th sampl prod wll b capturd by ths fxd ffcts. Carrr dumms ar ncludd to control for carrr-spcfc ffcts and yar dumms captur prod-spcfc ffcts. 4 ln(dpvar + α 6 + α, m, t HHI _ OA ) α+ α2 Onln m, t EU Pop + α m, t 7 + α HHI _ INT 2 EU gdp,t m,t m,t + α + α + β Yar Dummst + γ Carrr Dumms + η Rout Effcts 3 Immunty + α4 CS 8 Opnsky m,t + ε m, t,m, t, t + α + α9us Pop 5 m, t Avg Coup + α 0,m, t US Inc m, t (4) + α 5 ln(dpvarm, t ) α + α 2 Pct Onlnm, t + α 3 Pct Immun m, t + α 4 Pct CS m, t Avg Coup m, t + α 6 HHI _ OAm,t + α7 HHI _ INT m, t + α 8 Opnsky m,t + α 9US Pop + α0 US Inc + α EU Pop + α2 EU gdp + β Yar Dumms t m,t m, t + γ Carrr Shars m, t m,t + η Rout Effcts m + ε m, t m, t (5) In th prc rgrssons, th sgns of th coffcnts on th varabls masurng onln and mmunzd allanc srvc (Onln/Pct Onln and Immunty/Pct Immun) ar xpctd to b ngatv. Thory suggsts that ths typs of srvc ntrnalz th doubl margnalzaton problm and should hav lowr fars than non-allanc ntrln tnrars (th bas cas). Furthrmor, th coffcnt on th onln srvc varabl s xpctd to b dntcal to th coffcnt on th mmunty varabl to th xtnt that mmunzd allancs can prc lk a sngl frm. Th coffcnts on th varabls masurng cod sharng (CS/Pct CS) ar also xpctd to b ngatv to th xtnt that blatral prorat ngotatons ar mor ffcnt than far sttng through th IATA procss. 4 Th coffcnts on th yar and carrr dumms ar omttd from th tabls but avalabl from th author on rqust. 8

19 Th coffcnt on th avrag numbr of coupon sgmnts s lkly to b ngatv bcaus passngrs hav strong prfrncs for fwr stops. Th HHI coffcnts ar xpctd to hav postv sgns although to th xtnt that non-allanc ntrln srvc fars ar dctatd by IATA ngotatons, t s not clar that comptton from ths typ of srvc (HHI_Int) would hav an ffct on fars. Th coffcnts on th proxs for dmand (US Pop, EU Pop, US Inc, and EU Gdp) ar xpctd to hav postv coffcnts. 5 Fnally, f Opn Sks trats hav a masurabl ffct on ntrlnng passngrs, prhaps bcaus thy gnrally allow for mor capacty btwn th gatways, th coffcnt on th Opn Sks varabl should b ngatv. Rgrsson Rsults Tabls 4 and 5 contan th rsults of th fxd ffcts stmatons on prc. Tabl 4 has th rsults for th rout-carrr data st and Tabl 5, th rout data st. Thr ar four spcfcatons for ach data st. Th frst spcfcaton ncluds rout and tm-spcfc ffcts, whl th scond adds carrr-spcfc ffcts. Th thrd and fourth rpat ths spcfcatons usng nstrumntal varabls to control for th potntal ndognty of th HHI s. Laggd HHI s for all srvc, onln and allanc srvc, and ntrln srvc as wll as th laggd numbr of carrrs offrng onln srvc (and ts squar) and th numbr offrng mmunzd or cod shar srvcs (and ts squar) wr usd as nstrumnts. For th coffcnts of partcular ntrst, all th rgrssons produc smlar rsults that ar mostly consstnt wth th xpctatons. Focusng frst on th rout-carrr data n Tabl 4, th ffct of onln srvc on avrag fars s qualtatvly smlar across all of th spcfcatons and hghly statstcally sgnfcant. In th frst spcfcaton, onln srvc s assocatd wth 22.7% 5 In th rgrssons, th log transformaton of ths charactrstcs s usd. 9

20 lowr fars than non-allanc ntrln srvc. 6 Whn carrr-spcfc ffcts ar ncludd n th scond spcfcaton, th ffct of onln srvc drops to 7.0%. Ths gnrally suggsts that mor ffcnt carrrs on a partcular rout ar mor lkly to offr onln srvc. Th ffcts ar smlar, though slghtly smallr, n th IV stmats n columns thr and four. Wthout carrrffcts, onln srvc s assocatd wth 20.9% lowr fars and wth carrr-ffcts, 4.%. All of ths rsults ar consstnt wth th hypothss that carrrs ar not abl to prc non-allanc ntrln srvc ffcntly, but th xtrnalty s ntrnalzd n sngl carrr srvc. For mmunzd allancs, th rsults ar smlar. In th absnc of carrr-spcfc ffcts, mmunzd allanc fars ar 20.5% lowr than non-allanc ntrln fars. Whn carrr ffcts ar ncludd, th ffct shrnks to 7.6%. As wth onln srvc, ths suggsts that mor ffcnt carrrs ntr nto mmunzd allancs. Th IV stmats produc smlar but slghtly smallr ffcts. Wthout carrr ffcts, mmunzd srvc s assocatd wth 8.0% lowr fars and wth carrr ffcts, 5.%. All of ths rsults ar also hghly sgnfcant and suggst that mmunzd allancs, lk sngl carrr srvc, can ntrnalz th dmand xtrnalty assocatd wth nonallanc ntrlnng. Morovr, tsts wr constructd for th qualty of th onln and mmunty coffcnts to tst whthr th prcng bhavor of mmunzd allancs s dntcal to that of th sngl frm. In th rgrssons wthout carrr-spcfc ffcts, th hypothss that th coffcnts ar qual s rjctd, but whn carrr-spcfc ffcts ar ncludd, qualty cannot b rjctd. Bcaus th prfrrd spcfcatons nclud carrr-spcfc ffcts, th rsults ar consstnt wth th prdcton that mmunzd allancs can fully ntrnalz th dmand xtrnalty. 6 Bcaus th dpndnt varabl n th ths rgrssons s th log of avrag far, th margnal ffct of changng a varabl X s calculatd as xp(α X)-, whr α s th coffcnt and X s th chang n th ndpndnt varabl. Th txt rports ths transformatons of th coffcnts n th tabls. 20

21 Th rsults on cod sharng suggst t has roughly half of th ffct of onln or mmunty prcng. In th non-iv rgrssons, cod sharng s assocatd wth 9.4% and 0.0% lowr fars than non-allanc ntrlnng wthout and wth carrr ffcts, rspctvly. In th IV rgrssons, th ffcts ar gnrally smallr whr cod sharng s assocatd wth 7.6% and 8.6% lowr fars whn carrr ffcts ar omttd and ncludd, rspctvly. All ths rsults ar hghly sgnfcant, but, unlk th onln and mmunty rsults, th ncluson of carrr-spcfc ffcts dos not hav much mpact on th rsults. Ths s surprsng gvn th xpctaton that mor ffcnt or lowr cost carrrs wr gnrally ntrng nto cod sharng agrmnts to scap th IATA procss. Thus, th cod sharng coffcnt should hav shrunk whn carrr-spcfc ffcts wr ncludd. Bcaus th obsrvatons n th rout-carrr data st ar by carrr, ths far ffcts could b xpland n part by mx ffcts, but th rout data st dos not suffr from ths problm bcaus t s nvarant to changs n th mx of busnss and lsur passngrs btwn carrrs on a partcular rout. Howvr, bcaus th srvc typ varabls n ths data st ar convrtd to th prcntag of traffc travlng on a typ of srvc, comparablty of th coffcnts btwn th rout and rout-carrr rgrssons s not obvous. 7 For th rout-carrr data st, a chang n th numbr of passngrs travlng onln, for xampl, changs th avrag far on th rout by ( β -)RS whr β s th coffcnt for onln srvc n th rout-carrr rgrsson and RS s th rvnu shar of th passngrs swtchng to onln srvc. In th rout data st, a chang n th prcntag of passngrs travlng onln changs th avrag far on th rout by δ - whr δ s th coffcnt for onln srvc n th rout rgrssons and MS s th passngr MS 7 Appndx B shows th drvaton of ths formulas. 2

22 shar of swtchng passngrs. Th coffcnts ar drctly compatbl whn th rvnu shar and markt shar of th swtchng passngrs qual on (.. all passngrs on th rout swtch to onln srvc). As th rvnu and markt shar of swtchng passngrs dvat from on, ths xprssons wll only b approxmatly qual (so long as th xponnt s small ). Smlarly, dffrncs btwn th rvnu shar and markt shar of th swtchng passngrs wll also caus ths xprssons to dffr. Ths papr s concrnd wth whthr th rsults of th rout data st dffr qualtatvly from th rout-carrr data st, and thus, for smplcty th rsults ar tratd as f drctly compatbl, rcognzng that thy ar gnrally only approxmatly qual. Th rsults from th rout data st ar vry smlar to th rout-carrr data. Ths suggsts that mx ffcts ar not sgnfcantly dstortng th rsults, but th drcton of th ffct vars dpndng on th spcfcaton. Th txt focuss on th IV and non-iv rsults wth carrr ffcts ncludd (columns two and four). Th analyss of th spcfcatons wthout carrr ffcts s dntcal. In th non-iv rgrsson, th rsults for onln and mmunzd srvc ar slghtly smallr n th rout data st. Onln srvc s assocatd wth 4.9% lowr fars compard to 7.0% n th rout-carrr data. Immunzd allanc fars ar 3.7% lowr compard to 7.6% n th rout-carrr data. In th IV rgrsson, howvr, th rlatonshp flps and th ffcts n th rout data ar largr than n th rout-carrr data. For onln srvc, th fars ar 8.2% lowr compard to 4.% n th rout-carrr data. For mmunty, th fars ar 8.8% lowr compard to 5.% n th rout-carrr data. All of th non-iv rsults from th rout data st ar statstcally sgnfcant. In th IV spcfcaton, howvr, th coffcnt on onln srvc s not sgnfcant whn carrr ffcts ar ncludd, and th coffcnt on mmunz srvc s sgnfcant only at a 0% lvl. For cod sharng, th ffcts n th rout data ar consstntly smallr than thos n th 22

23 rout-carrr data, suggstng that cod sharng mght attract a dsproportonat shar of lsur traffc. In th non-iv rgrsson usng th rout data, cod sharng s assocatd wth 5.3% lowr fars compard to 0.0% n th rout-carrr data. In th IV rgrsson, cod sharng fars ar 4.6% lowr compard to 8.6% n th rout-carrr data. Whl th non-iv rsults ar statstcally sgnfcant n th rout data, th cod sharng coffcnts n th IV spcfcaton, whl smlar n magntud, ar not. In both data sts, th othr control varabls produc rsults mostly consstnt wth th xpctatons. Th avrag numbr of coupon sgmnts has a ngatv coffcnt n all spcfcatons and s statstcally sgnfcant n most, suggstng that consumrs vw addtonal coupon sgmnts as an nfror product. Th coffcnts on U.S. MSA pr capta ncom and Europan country GDP pr populaton ar postv and sgnfcant n vry spcfcaton, ndcatng that avrag fars ar hghr n placs wth gratr walth. Europan country populaton, howvr, tnds to hav a ngatv and sgnfcant coffcnt n th non-iv rgrssons, contrary to th xpctaton that hghr populatons should b assocatd wth hghr dmand. Ths coffcnts ar postv and sgnfcant n all of th IV rgrssons. U.S. MSA populaton s ngatv and sgnfcant n vry spcfcaton. Th masurs of concntraton produc unusual and vard rsults. HHI_Oa s statstcally nsgnfcant n all spcfcaton ncludng th IV stmats. HHI_Int, though t was not xpctd to hav much powr n xplanng comptton, has a postv coffcnt n all spcfcatons and s sgnfcant n svral. It s possbl that ths varabl s not so much masurng th ffcts of comptton as t s masurng somthng unobsrvd about th blatral trats btwn countrs (ths ssu s dscussd furthr n th output rgrsson scton blow). Fnally, th coffcnt on th Opn Sks varabl has a postv and sgnfcant coffcnt, suggstng th avrag fars for 23

24 tnrars trmnatng n countrs wth whch th U.S. has a mor lbralzd blatral traty ar hghr than thos wthout such a traty. Th ffct s roughly 3-5% hghr fars. Ths rsult s unxpctd and dscussd n mor dtal n th scton blow on Opn Sks. Output Rgrssons Tabl 6 contans th rsults of th fxd ffcts stmatons on output. In th rout-carrr data, th dpndnt varabl n ths rgrssons s th natural log of passngrs for a carrr on a rout, whl n th rout data, t s th natural log of total passngrs on th rout. Ths rgrssons masur th rspons of output to mmunzd and cod sharng allanc srvc. Gnrally, bcaus prcs for ths srvcs ar sgnfcantly lowr than non-allanc ntrln srvc, th coffcnts ar xpctd to b postv, but f consumrs vw ths products as nfror n som ways, thos output ffcts mght b small or non-xstnt. Th rsults suggst that, consstnt wth th prc ffcts, cod sharng and mmunzd allancs ar assocatd wth larg and sgnfcant ncrass n output. Th frst two columns of tabl 6 prsnt rsults usng th rout-carrr data wthout and wth carrr-spcfc ffcts. All ls qual, swtchng a carrr par n th data from non-allanc to mmunzd s assocatd wth a ncras n output of 6.9% n th rgrsson wthout carrr ffcts and 5.% wth thm. In th rout data, swtchng a rout from ntrly non-allanc srvc to ntrly mmunzd srvc s assocatd wth an 87.7% or 78.0% ncras n output wthout and wth carrr ffcts, rspctvly. Bcaus th avrag numbr of sampld passngrs n th rout data s 4, ths ffct s roughly an ncras of sampl passngrs. Cod sharng has a smlar ffct on output though wth roughly half th magntud. Th ffct of cod sharng on output rangs from % across th four spcfcatons. All ths rsults ar hghly sgnfcant and ar consstnt wth th 24

25 larg prc ffcts found n th prc rgrssons. Th othr coffcnts ar gnrally consstnt wth xpctatons. An ncras n th avrag numbr of coupon sgmnts s assocatd wth fwr passngrs bcaus passngrs dslk stopovrs. Incrass n dmand as masurd by th U.S. MSA populaton and pr capta ncom ar assocatd wth hghr output. Howvr, th Europan country populaton and GDP produc mxd rsults, oftn havng ngatv and sgnfcant coffcnts. Bcaus th data ar prdomnatly U.S. orgnatons, hghr EU country GDP may b corrlatd wth a hghr cost for Amrcans to travl to thos countrs and thus lowr dmand. Th coffcnt on th Opn Sks varabl s small and nsgnfcant n vry spcfcaton, suggstng that Opn Sks dd not hav much ffct on output n markts byond th gatway arports. HHI_Oa, th masur of concntraton for carrrs offrng onln or allanc srvc, has a ngatv and sgnfcant sgn, suggstng that ncrass n concntraton ar assocatd wth lowr output. Although ths s th xpctd sgn, t s somwhat surprsng bcaus th prc rgrssons dd not produc postv and sgnfcant ffcts. Th coffcnt on HHI_Int, th masur of concntraton for non-allanc ntrln srvc, s postv and sgnfcant, suggstng that an ncras n concntraton of ntrlnng carrrs s assocatd wth hghr output. Th prc rgrssons frquntly found that ncrass n HHI_Int wr assocatd wth hghr prcs. Ths unusual rsults could b du to corrlaton btwn HHI_Int and somthng unobsrvd about th blatral. Wthout mor nformaton about th blatrals and how thy wr nforcd ovr th yars, t s not possbl to tst ths thory. 25

26 V. Opn Sks Agrmnts and Anttrust Immunty On anomalous rsult n th rgrssons s th coffcnt on th Opn Sks varabl. Th rsult ndcats that avrag fars wr btwn 3-5% hghr f th tnrary trmnatd n a Europan country wth whch th U.S. had an Opn Sks traty. Bcaus Opn Sks trats rlax rstrctv blatral agrmnts, t s lkly that ths wr bnfcal to consumrs. In fact, DOT analyss suggsts traffc xpandd btwn countrs that sgnd Opn Sks agrmnts. 8 Thr ar svral possblts for why ths smngly anomalous rsult appars n th rgrsson. Frst, Opn Sks trats could b hghly corrlatd wth grants of mmunty and nduc a multcolnarty problm. Whl Opn Sks trats ar a ncssary condton for an mmunty grant, th varabls ar not partcularly hghly corrlatd bcaus plnty of non-mmunzd carrrs contnu to carry passngrs to countrs wth Opn Sks trats. Morovr, th U.S. has Opn Sks trats wth svral countrs whr no carrrs whr grantd anttrust mmunty. 9 Fnally, f th Opn Sks varabl s rmovd from th rgrssons, th rsults ar largly unchangd. Anothr possblty s that Opn Sks may hav shftd out th dmand curv for srvc btwn U.S. and Europan gatway arports. Bcaus that capacty s shard wth connctng passngrs, carrrs may hav ncrasd capacty lss than what was ncssary to mt all th nw dmand. Thus whl capacty ncrasd, th opportunty cost of carryng a connctng passngr ros. Hnc th prc also ros. Frst, to gt a sns for whthr th rgrssons ar confusng th ffcts of mmunty wth thos of Opn Sks, a subst of th data was xtractd from bfor and aftr th U.S.- 8 S DOT rport, Drgulaton Taks Off. 9 For xampl, th U.S. has Opn Sks trats wth Fnland, Dnmark and Norway but thr ar no mmunzd allancs wth hubs n thos countrs. 26

27 Grmany Opn Sks traty and th Untd-Lufthansa mmunty grant. Untd and Lufthansa bgan cod sharng n 994 whl mmunty and Opn Sks wth Grmany wnt nto ffct n 996. Th subst ncluds tnrars from th thrd quartr of 995 and 997 for passngrs who travld btwn th U.S. and Grmany. In practcal trms, ths mans th data wr rstrctd to ntrln tnrars on a U.S. carrr and Lufthansa that connctd n Grmany. Th chang n avrag fars ovr ths tm prod for Untd-Lufthansa tnrars was affctd by both Opn Sks and mmunty but not by th cod shar, whch wnt nto ffct n 994. Th chang n avrag fars for othr-u.s. carrr-lufthansa tnrars was affctd only by Opn Sks. Thus, f th Opn Sks agrmnt alon wr rsponsbl for th far dcrass, on should obsrv smlar ffcts for Untd-Lufthansa obsrvatons and othr-u.s. carrr-lufthansa obsrvatons. If thr ar dffrncs btwn Untd-Lufthansa and othr U.S.-Lufthansa obsrvatons, bcaus th Untd- Lufthansa cod shar was n ffct ovr th whol prod, thos dffrncs mght b attrbutd to th mmunty. Tabl 7 shows th avrag fars for both typs of obsrvatons. Ovr th prod whn mmunty and Opn Sks wr nactd, fars on Untd-Lufthansa tnrars fll 7.7% whl fars on othr-u.s.-lufthansa obsrvatons ros by 4.8%. Rcognzng that othr factors hav not bn controlld for, ths rsults ar consstnt wth th rgrsson rsults, suggstng that th larg prc dcrass ar assocatd wth mmunzd carrrs and not just a byproduct of Opn Sks trats. Scond, data on transatlantc capacts was assmbld to undrstand mor systmatcally how Opn Sks trats affctd th capacty dcson of carrrs n dffrnt typs of agrmnts (cod sharng and mmunzd allancs). Bcaus arlns ar a ntwork ndustry, thr s no manngful way to masur capacty on routs rqurng connctons, and th transatlantc capacty 27

28 s shard btwn th connctng passngrs and thos travlng n th gatway-to-gatway markt. Bcaus transatlantc capacty s an mportant componnt of capacty n th connctng markts, undrstandng how Opn Sks affctd t may b usful n undrstandng th prc ffcts. Transatlantc capacts as masurd by numbr of dparturs and total avalabl sats n th quartr wr calculatd usng th T-00 data for ach carrr offrng U.S.-Europ srvc for th sam yar prod covrd by th prc and output analyss. Lk th pror analyss, th data was aggrgatd to th rout-carrr lvl whr an obsrvaton s a carrr opratng srvc on a gatway rout, and t was aggrgatd to th rout lvl whr an obsrvaton s total capacty of all carrrs on th gatway rout. Ths allows for four sparat spcfcatons: two usng th numbr of dparturs as th capacty masur (on for th rout-carrr data st and on for th rout data st) and two usng total avalabl sats as th capacty masur. Dummy varabls wr usd to catgorz th obsrvatons by Opn Sks and typs of srvc. Th catgors ar as follows for th rout-carrr data.. Bas cas: no Opn Sks traty btwn th U.S. and th dstnaton country, and th carrr opratng th srvc dos not hav an mmunzd allanc or cod sharng agrmnt wth a carrr basd n th forgn country. 2. Cld-CS: no Opn Sks traty and th carrr has a cod sharng agrmnt wth a carrr basd n that country. 3. Opn-Int: an Opn Sks traty xsts btwn th U.S. and th dstnaton country, and th carrr has no cod sharng or mmunzd allanc wth a carrr from that country. 4. Opn-CS: an Opn Sks traty xsts, and th carrr has a cod sharng agrmnt wth a carrr from that country. 28

29 5. Opn-Immun: an Opn Sks traty xsts, and th carrr has an mmunzd allanc wth a carrr from that country. Ths last catgory s furthr brokn down by whthr th rout s btwn hubs of th mmunzd carrrs (Hub-Hub) or not (Othr). Th catgors ar th sam for th rout data st, but bcaus th obsrvatons ar aggrgatd to th rout lvl, th cod sharng and mmunty catgors ar turnd on f any carrr on th rout has a cod sharng or mmunzd allanc, rspctvly. In ths rgrssons, th populaton, GDP (normalzd by populaton) and pr capta ncom masurs usd n th allanc analyss wr ncludd, as wll as tm and rout-spcfc ffcts. In th rout-carrr data, carrr-spcfc ffcts wr also ncludd. Th rsults of th capacty rgrssons ar prsntd n Tabl 8. Th frst two columns us th rout data st and th dpndnt varabls ar th natural log of th numbr of opratons and th natural log of th numbr of sats, rspctvly. Th scond two columns rpat ths rgrssons usng th rout-carrr data. All four spcfcatons produc smlar rsults, namly, that all of th capacty ffcts assocatd wth Opn Sks trats ar du to xpanson by mmunzd allancs on th trunk routs btwn thr hubs. Ths xpanson nvolvd both an ncras n th numbr of dparturs and an ncras n th sz of th arcraft, and all th rsults ar hghly statstcally sgnfcant. In th rout data, th numbr of opratons on hub-hub routs wth mmunzd carrrs ros 20% whl th numbr of sats ros by 30%. In th rout-carrr data, th numbr of opratons ros by 9% and th numbr of sats by 36%. Thr was no statstcally sgnfcant chang n capacty aftr Opn Sks for carrrs wth mmunzd allancs to cts othr than btwn th partnrs hubs. Thr was also no statstcally sgnfcant ffct for cod sharng allancs or for non-allanc carrrs. Howvr, carrrs wth cod sharng allancs 29

30 to countrs wthout Opn Sks trats had a postv and sgnfcant ffct on capacty. In th rout data, capacty ros by approxmatd 0%. In th rout-carrr data, th ffcts wr smallr, roughly 4%, and th rsults ar lss statstcally sgnfcant. It sms lkly that th larg capacty xpansons on trunk routs ar to facltat connctons btwn th carrrs as mmunzd allancs shft thr non-allanc ntrln traffc on to thr partnr. Th xpctaton n th prc rgrssons was that Opn Sks would lad to a gnral ncras n srvc from a varty of carrrs on a varty of routs and thus prc would fall. Th capacty rgrssons suggst that ths gnral ncras n capacty dd not occur. Stll, ths dos not xplan th obsrvd prc ncrass. Although t cannot b tstd from ths data, t rmans possbl that carrrs xpandd capacty by lss than what was ncssary to mt th ncrasd dmand n both th gatway markts and th connctng markts. Ths rasd th opportunty cost of carryng a connctng passngr and rsultd n hghr fars. VI. Concluson Ths papr uss th most xtnsv data st assmbld to assss th ffcts of arln allancs on prcs and output. Lk th prvous ltratur, th rsults suggst that cod sharng and anttrust mmunty ar assocatd wth sgnfcantly lowr fars than non-allanc ntrln srvc. Howvr, th prc ffcts found hr usng an yar panl of data ar somwhat smallr than thos found n th cross sctonal analyss of prvous work. Ths rsults suggst that mmunzd fars ar 4-22% lowr than tradtonal ntrln and cod sharng 5-0% lowr. Ths papr also fnds that onln srvc s assocatd wth fars 4-23% lowr than tradtonal ntrln fars. Tsts of th hypothss that th onln prc ffct s dntcal to th 30

31 mmunty prc ffct cannot b rjctd n many spcfcatons. Bcaus onln srvc dos not suffr from doubl margnalzaton problms, ths rsult s consstnt wth th hypothss that nonallanc prcng s subjct to ths xtrnalty but that t s compltly ntrnalzd n mmunzd allancs. Bcaus fars for cod sharng allancs l roughly halfway btwn th mmunzd/onln fars and th non-allanc fars, t sms lkly that cod sharng s nsuffcnt to lmnat th xtrnalty but stll has som bnfts for consumrs. Ths papr also fnds lttl vdnc that changs n th busnss/lsur passngr mx lads to a sgnfcant ovr or undr stmat of th ffct of allancs. Ths papr also stmats th output ffcts assocatd wth ths allancs. Consstnt wth th prc ffcts, mmunzd allancs ar assocatd wth larg ncrass n output, btwn 5-88%. Smlarly, cod sharng s assocatd wth 22-45% ncrass n output. Lastly, th prc rgrssons fnd, somwhat surprsngly, that Opn Sks trats ar assocatd wth 3-5% hghr fars on ths connctng routs. An analyss of capacty changs on th transatlantc sgmnts bfor and aftr Opn Sks suggsts that all of th capacty xpanson assocatd wth Opn Sks trats s du to xpanson by carrrs wth mmunzd allancs on routs btwn thr hubs. Bcaus Opn Sks dd not lad to capacty ncrass from a varty of carrrs, th xpctaton that Opn Sks should hav rsultd n lowr prcs on th connctng routs may hav bn ncorrct. 3