Abstract: This paper explores beneficial network spillovers resulting from an airline-alliance extension like those that occur when a US carrier adds new foreign partners to its existing international alliance. In the model, a US carrier and an existing foreign alliance partner initially cooperate in providing service between an interior US domestic endpoint and a foreign destination via an international US gateway. Then, a second foreign carrier, which previously provided traditional interline service to a different foreign endpoint via the same gateway, also becomes an alliance partner of the US carrier. Since trips to the two foreign destinations from the interior US endpoint share the same domestic route to the gateway, cost complementarity between the two international markets exists under economies of density. As a result, the alliance extension, by reducing the fare and raising traffic to the new foreign endpoint (which flows on the domestic segment), leads to a lower cost for alliance service to the original foreign endpoint, further reducing the fare in this market, which was already low due to the presence of the initial alliance. The paper analyzes this beneficial spillover along with others using a simple model.

Keywords: alliances; networks; economies of traffic density; double marginalization

JEL classification: D42; L12; L41; L42; L93; R4