This paper examines the price effect and efficiency of codeshare contracts between codeshare carriers in the airline industry. Different supply models of vertical relationships are compared. The models considered are a vertically integrated model, a linear pricing model, a linear pricing model unifying firm’s both upstream and downstream profit, an alternative linear pricing model that allows upstream markup only in specific markets, and a model that allows for cooperative pricing behavior within codeshare alliances. I provide empirical evidence that no upstream margin exists in the vertical relationship, but the U.S. domestic codeshare agreement facilitates tacit collusion. Counterfactual simulations show that prices would be about 2% lower under Nash-Bertrand competition but the withdrawal of codeshare products decreases the consumer surplus in 46.42% of markets where the benefits of product variety outweigh the price effects.
