Suppose that airlines 3 and 4 do not form an alliance

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Unformatted text preview: airlines 1 and 2 will if 0 d b 0.66 and will not if 0.66 < d b d b < 1. Now suppose that airlines 3 d b and 4 form an alliance. Then, airlines 1 and 2 will if 0 < not if 0.77 < 0.77 and will < 1. The analysis is symmetric to study the best response for airlines 3 and 4. Thus, the next proposition follows in a straightforward manner. Proposition 3 i) No alliances will occur in equilibrium for ii) Both alliances take place in equilibrium for d b d b (0.77, 1). (0, 0.66]. d b iii) No alliances and both alliances are equilibria for (0.66, 077]. The degree of product differentiation indicates how intense competition is in the market. We conclude that a setting with alliances arises when competition intensity is low whereas alliances will not take place in equilibrium when competition intensity is tough. It must be noted that asymmetric equilibria in which only an alliance occurs is not possible in our demand-based setting. This suggests that some cost structure (e.g. returns to traffi...
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