Cooperation and Competition in the U.S. Airline Industry: Essays on Relational Contracts and Common Ownership

Sriteja R. Burla

Advisor: Tyler Cowen, PhD, Department of Economics

Committee Members: Timothy Groseclose, Alex Tabarrok

Online Location, Zoom
July 24, 2023, 09:00 AM to 11:00 AM

Abstract:

This dissertation comprises three empirical essays exploring the themes of cooperation and competition within the U.S. airline industry.

Chapter 1 studies the effects of relational contracts on operational performance. Relational contracts are informal agreements employed in situations where the parties involved anticipate the need for on-going cooperation, adaptability, and flexibility in the relationship. Major carriers outsource some of their flight operations to regional airlines in the U.S. airline industry. Formal contracts governing outsourcing partnerships are inadequate for managing real-time adjustments to outsourced operations during adverse weather conditions. Major carriers establish self-enforcing agreements with their regional partners to secure efficient real-time adaptation, which is crucial for operational performance. I investigate whether the extent of relational contracting by a major carrier at an airport affects operational performance of its flights as measured by delays and cancellations. I find that relational contracts enhance operational performance, particularly during adverse weather, by facilitating real-time adaptation.

In chapter 2, I study the impact of common ownership on product market competition. Common ownership refers to institutional investors owning shares in competing firms. It is theorized that common ownership may lead to actions that harm competition, as managers may prioritize rivals' profits and internalize their price effects. I examine the impact of common ownership on anti-competitive pricing using empirical tests proposed by Ciliberto et al. (2019). These tests suggest that common ownership reduces price differences between firms and increases price rigidity. Analyzing data from the U.S. airline industry, I find no evidence supporting the idea that common ownership leads to anti-competitive pricing strategies. Contrary to prior studies focusing on price levels, my analysis of nuanced pricing patterns challenges the notion of common ownership inducing anti-competitive behavior.

Similarly, the third chapter investigates whether common ownership leads to anti-competitive pricing in the airline industry, focusing on structural analysis. Through a series of price regressions, I first provide reduced-form evidence of the relationship between prices and common ownership, revealing an insignificant negative correlation. Next, I estimate a structural model using the equilibrium framework proposed by Ciliberto and Williams (2014). This model encompasses both the demand and supply sides, with the conduct parameters modeled as functions of common ownership induced “profit weights”. I find that the conduct parameter representing the effect of common ownership is negative and insignificant, implying that common ownership does not lead to higher prices compared to a competitive Bertrand-Nash equilibrium.