Subcontracting Network Formation Among US Airline Carriers

In this paper, we use Bayesian estimation to study subcontracting network formation and pricing decisions in the US airline industry. We find that, a major carrier is more likely to enter a route in subcontracting services if its rivals have already subcontracted while regional carriers prefer to avoid competition. For existing major carriers per-route, self-service and use of subsidiaries are complementary to subcontracting, while code-sharing is a substitute. Carrier similarity and previously formed networks have significant impacts on new network formations. Taking potential endogeneity issues into account, we find that major carriers’ subcontracting behaviors decrease ticket prices by 3.4%.