The Price Effects of Codeshare Agreements under the United-Continental Airline Merger (2014)

Undergraduate: Vinayak Balasubramanian

Faculty Advisor: Tiago Pires
Department: Economics

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The existence of operational inefficiency in the U.S. airline industry, combined with rising costs and financial problems, has long prompted airlines to find ways to consolidate through mergers, and to cooperate through codeshare agreements and alliances. While the price and competition effects of mergers and codeshare agreements are well documented by existing research, there is comparatively little literature over a merger¿s impact on the codeshare products between the merging firms, and on markets abundant in codeshare passengers. This paper seeks to fill this research gap by analyzing price data for 75 million passengers, aggregated into 75,000 products and 50,000 markets, from four consecutive quarters before and four consecutive quarters after the United-Continental Airline merger. After accounting for changes in market demographics, cost of fuel, market concentration, and industry-wide prices, the results indicate a statistically significant price increase in formerly codeshare products, which is especially pronounced in markets with lower market concentration. The results also indicate a positive relationship between the proportion of codeshare passengers and market prices. In light of the extensive airline consolidation in recent years, and the fact that over one-third of passengers fly on codeshare tickets, these findings can help inform policy-makers in making decisions concerning mergers, as well as in overseeing future codeshare agreements and alliances.