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Airline Services Agreements : A Structural Model of Network Formation

Airline services agreements are necessary for direct flights between countries and consequently they are central to the operation of the commercial airline market. These agreements are bilateral in nature but their coverage is far from universal. To gain insight into why some agreements are signed but other links go unrealized, we study a new data set on airlines services agreements from the perspective of strategic network formation. We develop a structural model based on moment inequalities that uses the concepts of pairwise stability to generate estimating equations and also introduce methods to implement refinements of pairwise stability. The network structure is found to be important in determining the choices of countries to form agreements, and that the jointly optimal network of agreements would be substantially different than the observed outcome. Very Preliminary!