Deregulation control by mergers and acquisitions: a game theoretic analysis of the Chinese airline industry
Abstract
The major challenges of deregulation are lax market entry, sudden surge in new market entrants, and the intense price wars that ensue, thus causing major losses for any industry. This paper investigates whether deregulation can be structured through a controlled Mergers and Acquisitions (M&As) process by means of government intervention, and how this promotes the performance of the players in the industry. We study this in the context of the Chinese aviation industry as an ideal microcosm of our problem statement. This is because China’s civil aviation industry has witnessed many of the above challenges since its deregulation and economic reforms in 1979, which saw the beginning of a transformation from a fully state-owned machinery to a rent-seeking private sector. The post controlled deregulation process through M&As led to three dominant carriers: Air China Limited (AC), China Southern Airlines (CS), and China Eastern Airlines (CE). Using a 3-player non-cooperative perfect information Cournot oligopoly game model, the strategic efficacy of the government intervention to consolidate the industry based on operating expenses, air passenger revenue, and profit data are investigated respectively. All three airlines are better off after the exercise, with the industry facing a more sustainable growth by the intervention.
Keyword : game theory, airlines, aviation, industry consolidation, mergers and acquisitions
How to Cite
Ignatius, J., Tan, T. S., Dhamotharan, L., & Goh, M. (2018). Deregulation control by mergers and acquisitions: a game theoretic analysis of the Chinese airline industry. Technological and Economic Development of Economy, 24(6), 2277-2294. https://doi.org/10.3846/20294913.2016.1266410
This work is licensed under a Creative Commons Attribution 4.0 International License.
References
Adler, N.; Smilowitz, K. 2007. Hub-and-spoke network alliances and mergers: price-location competition in the airline industry, Transportation Research Part B 41: 394–409. https://doi.org/10.1016/j.trb.2006.06.005
Agarwal, J.; Wu, T. 2004. China’s entry to WTO: global marketing issues, impact, and implications for China, International Marketing Review 21(3): 279–300. https://doi.org/10.1108/02651330410539620
Artz, B.; Heywood, J. S.; McGinty, M. 2009. The merger paradox in a mixed oligopoly, Research in Economics 63: 1–10. https://doi.org/10.1016/j.rie.2008.10.003
Barbot, C. 2009. Airport and airlines competition: incentives for vertical collusion, Transportation Research Part B 43: 952–965. https://doi.org/10.1016/j.trb.2009.04.001
Bloomberg. 2016. Without legacy China Budget Airlines Gain on “Big Three”. Bloomberg News [online], [cited 10 July 2016]. Available from Internet: http://www.bloomberg.com/news/articles/2016-03-30/without-legacy-baggage-china-budget-airlines-gain-on-big-three
Boru, B. 2006. Ryanair: the Cú Chulainn of civil aviation, Journal of Strategic Marketing 14(1): 45–55. https://doi.org/10.1080/09652540500511420
Cao, Q.; Lv, J.; Zhang, J. 2015. Productivity efficiency analysis of the airlines in China after deregulation, Journal of Air Transport Management 42: 135–140. https://doi.org/10.1016/j.jairtraman.2014.09.009
Chiu, J. 2013. China’s air regulator will consider ways to boost budget-carrier market [online], [cited 5 March 2016]. Available from Internet: http://www.wsj.com/articles/SB10001424127887323854904578634920047272886
Chow, C. K. W. 2010. Measuring the productivity changes of Chinese airlines: the impact of the entries of non-state-owned carriers, Journal of Air Transport Management 16(6): 320–324. https://doi.org/10.1016/j.jairtraman.2010.04.001
Chow, C. K. W.; Fung, M. K. Y. 2012. Measuring the effects of China’s airline mergers on the productivity of state-owned carriers, Journal of Air Transport Management 25: 1–4. https://doi.org/10.1016/j.jairtraman.2011.08.006
Clougherty, J. A.; Duso, T. 2009. The impact of horizontal mergers on rivals: gains to being left outside a merger, Journal of Management Studies 46(8): 1365–1395. https://doi.org/10.1111/j.1467-6486.2009.00852.x
Dougan, M. 2002. A political economy analysis of China’s civil aviation industry. New York, USA and London, UK: Routledge.
Evans, N. 2001. Collaborative strategy: an analysis of the changing world of international airline alliances, Tourism Management 22(3): 229–243. https://doi.org/10.1016/S0261-5177(01)00024-3
Fan, T.; Vigeant-Langlois, L.; Geissler, C.; Bosler, B.; Wilmking, J. 2001. Evolution of global airline strategic alliance and consolidation in the twenty-first century, Journal of Air Transport Management 7(6): 349–360. https://doi.org/10.1016/S0969-6997(01)00027-8
Fu, X.; Lei, Z.; Wang, K.; Yan, J. 2015. Low cost carrier competition and route entry in an emerging but regulated aviation market – the case of China, Transportation Research Part A 79: 3–16. https://doi.org/10.1016/j.tra.2015.03.020
Gillen, D.; Morrison, W. G. 2005. Regulation, competition and network evolution in aviation, Journal of Air Transport Management 11(3): 161–174. https://doi.org/10.1016/j.jairtraman.2005.03.002
Harford, J. 2005. What drives merger waves?, Journal of Financial Economics 77(3): 529–560. https://doi.org/10.1016/j.jfineco.2004.05.004
Honert, R. C. V. D.; Stewart, T. J. 1992. A game-theoretic model for mergers and acquisitions, European Journal of Operational Research 59(2): 275–287. https://doi.org/10.1016/0377-2217(92)90141-U
Kole, S. R.; Lehn, K. M. 1999. Deregulation and the adaptation of governance structure: the case of the U.S. airline industry, Journal of Financial Economics 52(1): 79–117. https://doi.org/10.1016/S0304-405X(99)00005-7
Kumar, S.; Bansal, L. K. 2008. The impact of mergers and acquisitions on corporate performance in India, Management Decision 46(10): 1531–1543. https://doi.org/10.1108/00251740810920029
Lei, Z.; O’Connell, J. F. 2011. The evolving landscape of Chinese aviation policies and impact of a deregulating environment on Chinese carriers, Journal of Transport Geography 19(4): 829–839. https://doi.org/10.1016/j.jtrangeo.2010.10.010
Lin, M. H. 2004. Strategic airline alliances and endogenous Stackelberg equilibria, Transportation Research Part E 40(5): 357–384. https://doi.org/10.1016/j.tre.2003.09.001
Lin, M. H. 2008. Airline alliances and entry deterrence, Transportation Research Part E 44(4): 637–652. https://doi.org/10.1016/j.tre.2007.05.003
Mar, P.; Young, M. N. 2001. Corporate governance in transition economies: a case study of two Chinese airlines, Journal of World Business 36(3): 280–302. https://doi.org/10.1016/S1090-9516(01)00056-6
Miles, S. J.; Mangold, W. G. 2005. Positioning Southwest Airlines through employee branding, Business Horizons 48: 535–545. https://doi.org/10.1016/j.bushor.2005.04.010
Park, K. H. 2009. Has bank consolidation in Korea lessened competition?, The Quarterly Review of Economics and Finance 49(2): 651–667. https://doi.org/10.1016/j.qref.2008.02.003
Peng, M. 2010. Global business. 2nd ed. Cengage Learning.
Powers, I. Y. 1987. A game-theoretic model of corporate takeovers by major stockholders, Management Science 33(4): 467–483. https://doi.org/10.1287/mnsc.33.4.467
Shaw, S. L.; Lu, F.; Chen, J.; Zhou, C. 2009. China’s airline consolidation and its effects on domestic airline networks and competition, Journal of Transport Geography 17(4): 293–305. https://doi.org/10.1016/j.jtrangeo.2009.02.005
Tahmincioglu, E. 2006. Double vision, Workforce Management 85(1): 22–28.
The World Bank. 2016. Air Transport, passengers carried [online], [cited 5 March 2016]. Available from Internet: http://data.worldbank.org/indicator/IS.AIR.PSGR
Tichy, G. 2001. What do we know about success and failure of mergers?, Journal of Industry, Competition and Trade 1(4): 347–394. https://doi.org/10.1023/A:1019521325295
Wang, K.; Fan, X.; Fu, X.; Zhou, Y. 2014. Benchmarking the performance of Chinese airlines: an investigation of productivity, yield and cost competitiveness, Journal of Air Transport Management 38: 3–14. https://doi.org/10.1016/j.jairtraman.2013.12.012
Zhang, Q.; Yang, H.; Wang, Q.; Zhang, A. 2014. Market power and its determinants in the Chinese airline industry, Transportation Research Part A: Policy and Practice 64(June): 1–13. https://doi.org/10.1016/j.tra.2014.03.003
Zhang, Y.; Round, D. K. 2008. China’s airline deregulation since 1997 and the driving forces behind the 2002 airline consolidations, Journal of Air Transport Management 14(3): 130–142. https://doi.org/10.1016/j.jairtraman.2008.03.001
Zhang, Y.; Round, D. K. 2009. The effects of China’s airline mergers on prices, Journal of Air Transport Management 15(6): 315–323. https://doi.org/10.1016/j.jairtraman.2009.04.005
Zhang, Y.; Round, D. K. 2011. Price wars and price collusion in China’s airline markets, International Journal of Industrial Organization 29(4): 361–372. https://doi.org/10.1016/j.ijindorg.2010.07.005
Agarwal, J.; Wu, T. 2004. China’s entry to WTO: global marketing issues, impact, and implications for China, International Marketing Review 21(3): 279–300. https://doi.org/10.1108/02651330410539620
Artz, B.; Heywood, J. S.; McGinty, M. 2009. The merger paradox in a mixed oligopoly, Research in Economics 63: 1–10. https://doi.org/10.1016/j.rie.2008.10.003
Barbot, C. 2009. Airport and airlines competition: incentives for vertical collusion, Transportation Research Part B 43: 952–965. https://doi.org/10.1016/j.trb.2009.04.001
Bloomberg. 2016. Without legacy China Budget Airlines Gain on “Big Three”. Bloomberg News [online], [cited 10 July 2016]. Available from Internet: http://www.bloomberg.com/news/articles/2016-03-30/without-legacy-baggage-china-budget-airlines-gain-on-big-three
Boru, B. 2006. Ryanair: the Cú Chulainn of civil aviation, Journal of Strategic Marketing 14(1): 45–55. https://doi.org/10.1080/09652540500511420
Cao, Q.; Lv, J.; Zhang, J. 2015. Productivity efficiency analysis of the airlines in China after deregulation, Journal of Air Transport Management 42: 135–140. https://doi.org/10.1016/j.jairtraman.2014.09.009
Chiu, J. 2013. China’s air regulator will consider ways to boost budget-carrier market [online], [cited 5 March 2016]. Available from Internet: http://www.wsj.com/articles/SB10001424127887323854904578634920047272886
Chow, C. K. W. 2010. Measuring the productivity changes of Chinese airlines: the impact of the entries of non-state-owned carriers, Journal of Air Transport Management 16(6): 320–324. https://doi.org/10.1016/j.jairtraman.2010.04.001
Chow, C. K. W.; Fung, M. K. Y. 2012. Measuring the effects of China’s airline mergers on the productivity of state-owned carriers, Journal of Air Transport Management 25: 1–4. https://doi.org/10.1016/j.jairtraman.2011.08.006
Clougherty, J. A.; Duso, T. 2009. The impact of horizontal mergers on rivals: gains to being left outside a merger, Journal of Management Studies 46(8): 1365–1395. https://doi.org/10.1111/j.1467-6486.2009.00852.x
Dougan, M. 2002. A political economy analysis of China’s civil aviation industry. New York, USA and London, UK: Routledge.
Evans, N. 2001. Collaborative strategy: an analysis of the changing world of international airline alliances, Tourism Management 22(3): 229–243. https://doi.org/10.1016/S0261-5177(01)00024-3
Fan, T.; Vigeant-Langlois, L.; Geissler, C.; Bosler, B.; Wilmking, J. 2001. Evolution of global airline strategic alliance and consolidation in the twenty-first century, Journal of Air Transport Management 7(6): 349–360. https://doi.org/10.1016/S0969-6997(01)00027-8
Fu, X.; Lei, Z.; Wang, K.; Yan, J. 2015. Low cost carrier competition and route entry in an emerging but regulated aviation market – the case of China, Transportation Research Part A 79: 3–16. https://doi.org/10.1016/j.tra.2015.03.020
Gillen, D.; Morrison, W. G. 2005. Regulation, competition and network evolution in aviation, Journal of Air Transport Management 11(3): 161–174. https://doi.org/10.1016/j.jairtraman.2005.03.002
Harford, J. 2005. What drives merger waves?, Journal of Financial Economics 77(3): 529–560. https://doi.org/10.1016/j.jfineco.2004.05.004
Honert, R. C. V. D.; Stewart, T. J. 1992. A game-theoretic model for mergers and acquisitions, European Journal of Operational Research 59(2): 275–287. https://doi.org/10.1016/0377-2217(92)90141-U
Kole, S. R.; Lehn, K. M. 1999. Deregulation and the adaptation of governance structure: the case of the U.S. airline industry, Journal of Financial Economics 52(1): 79–117. https://doi.org/10.1016/S0304-405X(99)00005-7
Kumar, S.; Bansal, L. K. 2008. The impact of mergers and acquisitions on corporate performance in India, Management Decision 46(10): 1531–1543. https://doi.org/10.1108/00251740810920029
Lei, Z.; O’Connell, J. F. 2011. The evolving landscape of Chinese aviation policies and impact of a deregulating environment on Chinese carriers, Journal of Transport Geography 19(4): 829–839. https://doi.org/10.1016/j.jtrangeo.2010.10.010
Lin, M. H. 2004. Strategic airline alliances and endogenous Stackelberg equilibria, Transportation Research Part E 40(5): 357–384. https://doi.org/10.1016/j.tre.2003.09.001
Lin, M. H. 2008. Airline alliances and entry deterrence, Transportation Research Part E 44(4): 637–652. https://doi.org/10.1016/j.tre.2007.05.003
Mar, P.; Young, M. N. 2001. Corporate governance in transition economies: a case study of two Chinese airlines, Journal of World Business 36(3): 280–302. https://doi.org/10.1016/S1090-9516(01)00056-6
Miles, S. J.; Mangold, W. G. 2005. Positioning Southwest Airlines through employee branding, Business Horizons 48: 535–545. https://doi.org/10.1016/j.bushor.2005.04.010
Park, K. H. 2009. Has bank consolidation in Korea lessened competition?, The Quarterly Review of Economics and Finance 49(2): 651–667. https://doi.org/10.1016/j.qref.2008.02.003
Peng, M. 2010. Global business. 2nd ed. Cengage Learning.
Powers, I. Y. 1987. A game-theoretic model of corporate takeovers by major stockholders, Management Science 33(4): 467–483. https://doi.org/10.1287/mnsc.33.4.467
Shaw, S. L.; Lu, F.; Chen, J.; Zhou, C. 2009. China’s airline consolidation and its effects on domestic airline networks and competition, Journal of Transport Geography 17(4): 293–305. https://doi.org/10.1016/j.jtrangeo.2009.02.005
Tahmincioglu, E. 2006. Double vision, Workforce Management 85(1): 22–28.
The World Bank. 2016. Air Transport, passengers carried [online], [cited 5 March 2016]. Available from Internet: http://data.worldbank.org/indicator/IS.AIR.PSGR
Tichy, G. 2001. What do we know about success and failure of mergers?, Journal of Industry, Competition and Trade 1(4): 347–394. https://doi.org/10.1023/A:1019521325295
Wang, K.; Fan, X.; Fu, X.; Zhou, Y. 2014. Benchmarking the performance of Chinese airlines: an investigation of productivity, yield and cost competitiveness, Journal of Air Transport Management 38: 3–14. https://doi.org/10.1016/j.jairtraman.2013.12.012
Zhang, Q.; Yang, H.; Wang, Q.; Zhang, A. 2014. Market power and its determinants in the Chinese airline industry, Transportation Research Part A: Policy and Practice 64(June): 1–13. https://doi.org/10.1016/j.tra.2014.03.003
Zhang, Y.; Round, D. K. 2008. China’s airline deregulation since 1997 and the driving forces behind the 2002 airline consolidations, Journal of Air Transport Management 14(3): 130–142. https://doi.org/10.1016/j.jairtraman.2008.03.001
Zhang, Y.; Round, D. K. 2009. The effects of China’s airline mergers on prices, Journal of Air Transport Management 15(6): 315–323. https://doi.org/10.1016/j.jairtraman.2009.04.005
Zhang, Y.; Round, D. K. 2011. Price wars and price collusion in China’s airline markets, International Journal of Industrial Organization 29(4): 361–372. https://doi.org/10.1016/j.ijindorg.2010.07.005