Airline code-share alliances and costs: Imposing concavity on translog cost function estimation

Chew Lian Chua, Hsein Kew, Jongsay Yong

Research output: Journal PublicationArticlepeer-review

38 Citations (Scopus)

Abstract

This paper provides an assessment of how airline code-share alliances affect the costs of the airline industry. It makes two contributions to the literature. First, it measures the effects of airline alliances by estimating a translog cost function using a panel dataset of 10 major U.S.-based airlines over 29 quarters. Secondly, it ensures concavity of the estimated cost function by using the procedure suggested by Ryan and Wales (2000, Economics Letters 67, 253-260). A conventional translog cost function is first estimated and scale estimates are computed. Unfortunately, the estimated function fails the curvature requirement, which makes interpreting the estimated effects of alliances somewhat dubious. Hence, we re-estimate the cost function by imposing local concavity restrictions. We find that large alliance partners have a small negative effect on airlines' costs, but small alliance partners' effect on costs appear to be positive, although the magnitude is negligible. We also find material differences in the estimates of scale economies after imposing local concavity.

Original languageEnglish
Pages (from-to)461-487
Number of pages27
JournalReview of Industrial Organization
Volume26
Issue number4
DOIs
Publication statusPublished - Jun 2005
Externally publishedYes

Keywords

  • Airline alliances
  • Concavity
  • Costs
  • Translog

ASJC Scopus subject areas

  • Economics and Econometrics
  • Strategy and Management
  • Organizational Behavior and Human Resource Management
  • Management of Technology and Innovation

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