Pricing effects of code sharing in Africa

We investigate whether cooperation in the form of code-sharing agreements results in lower fares in the African context. While there is extensive research on cooperative agreement in the airline industry, little is known on the effect of airline cooperation in developing contexts. We analyze the direct effect of code-sharing agreements on the fares of connecting flights that were previously offered as interline flights and switch to code-share as well as the indirect effect of having airlines that cooperate on the fares of those wo do not. To study these effects we exploit a rich dataset comprising the universe of international connecting routes in Africa, with information on operating and marketing carriers, and monthly fares, in the period 2017-2019. In addition to the inclusion of route-month and operating pair-route fixed effect, which account for shocks to the demand of the carriers in the specific market, we instrument the code-sharing decision exploiting the carriers' number of direct flights in code-sharing from the gateway. Our main results show that the activation of a CS agreement reduces airfares in African international routes by approximately 18%. This evidence is in line with the internalization of double marginalization and improvements in cost-efficiency found in the literature. When testing whether the pro-competitive effect of the introduction of code sharing percolates to interline, online, and direct airfares on the same route we find mixed evidence: in connecting flights with interline service we find that, all else equal, when code sharing is introduced on a route, other airlines operating interline itineraries react by reducing their price by about 10%. In flights with online or direct service, airlines do not react to the code sharing introduction. We interpret this as evidence of product differentiation as carriers providing direct or online itineraries are not likely to perceive the flight in code-sharing as threat. Our findings confirm that the African aviation market has a high potential growth coming from airlines' cooperation.