Subcontracting Network Formation Among U.S. Airline Carriers*

Abstract

In this paper, we use Bayesian estimation to study subcontracting network formation and pricing decisions in the U.S. airline industry with DB1B data. 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 decreases prices by 3.4%.1 Network analysis has been used broadly in sociology (Currarini et al. [2009]; Offer and Fischer [2018]; Isakov et al. [2019]), in political science (Ward et al. [2011]), in epidemiology (Barabási et al. [2011]), and in communications and psychology (Newman [2001]; Grunspan et al. [2014]) among other fields. Applications can be found in social media, partner choice, trade relations, epidemics, scientific collaborations, board member relations, investor connections, R&D collaborations, job market and natural disaster management. Jackson et al. [2017] and Jackson [2011] provide excellent reviews.