Vertical differentiation and airline alliances: The effect of antitrust immunity

Abstract

This paper explores the impact of granting antitrust immunity (ATI) to airline alliances in a novel and realistic framework characterized by vertically-differentiated air services. Our theoretical model suggests that non-ATI alliances result in higher quality services at higher fares, whereas granting ATI produces the opposite effect. Using data on the transatlantic market over the period 2010-2017, our theoretical findings on service quality are empirically confirmed. We also relate our theoretical predictions on fares to the empirical results in Brueckner and Singer (2019). Our results indicate that alliances (ATI and non-ATI) concentrate a higher proportion of frequencies on high-quality routings, although airport congestion could mitigate this effect.