Adaptation and Vertical Integration in the Airline Industry

American Economic Review · 2009 · Volume 99 · Issue 5

Abstract

We explore patterns of vertical integration in the US airline industry. Major airlines subcontract portions of their network to regional partners, which may or may not be owned. We investigate if ownership economizes on ex post renegotiation costs. We estimate whether airlines are more likely to use owned regionals on city pairs with adverse weather (which makes adaptation decisions more frequent) and on city pairs that are more integrated into the major's network (which raises the costs of having adaptation decisions resolved suboptimally). Our results suggest a robust empirical relationship between adaptation and vertical integration in this setting. (JEL L14, L22, L24, L93)

Keywords

Transactional Relationships, Contracts and Reputation, Networks, Firm Organization and Market Structure, Contracting Out, Joint Ventures, Technology Licensing, Air Transportation

Enable JavaScript for citation tools and additional paper interactions.