Strategic Alliance versus Competition: Airlines’ Choices and their Impact on Economic Welfare


This paper theoretically analyses the duopolistic behavior of two hypothetical airlines operating in a four-point hub-and-spoke route network system, and examines the impact of this behavior on economic welfare. The important character of these two airlines is that they are of different (i.e., asymmetric) cost structures and products. The main findings are that (1) in rare cases, two asymmetric airlines might form a strategic alliance, and (2) Cournot competition is much more likely to generate economic welfare than a strategic alliance. However, in some cases in which the degree of economies of density is sufficiently small, two firms may engage in Cournot competition, despite the fact that strategic alliance generates greater economic welfare. Therefore, the degree of economies of density is the key factor to which governments should attend.

Keywords: Airlines with asymmetric structure, Two-stage duopolistic game, Economies of density, Cost complementality, Economic welfare

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