Wednesday, November 18, 2009

Carve-Outs Under Airline Antitrust Immunity

There is an impressive new paper up online discusing the economic ramifications of the Department of Transportation's carve-outs to its grants of antitrust immunity for airline alliances.  See Jan K. Brueckner & Stef Proost, Carve-Outs Under Airline Antitrust Immunity (CESifo Working Paper Series No. 2848, Nov. 2009) (available from SSRN here).  From the abstract:

This paper offers the first formal economic analysis of carve-outs under airline antitrust im- munity. Carve-outs are designed to limit the potential anticompetitive effects of cooperation by alliance partners in hub-to-hub markets, where they provide overlapping nonstop service. While the paper shows that carve-outs are beneficial when the alliance does not involve full integration of the partners’ operations on the hub-to-hub route, its key point is that a carve-out may be harmful when imposed on a joint-venture alliance. A JV alliance involves full exploitation of economies of traffic density on the hub-to-hub route, and a carve-out prevents the realization of these benefits. While a carve-out may limit anticompetitive incentives on the hub-to-hub route, welfare may be reduced if the resulting gains are overshadowed by the efficiency loss generated by the carve-out.

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