Fair Standardization Cartels over Bertrand Price Competition - Application to the Aviation Service Industry M&A -

Standardization plays critical and pervasive roles in the modern aviation industry, spanning operations, maintenance, safety protocols, and passenger experiences. While standardization can generate significant efficiency gains (social welfare), its development often requires cooperation among competitors, particularly when the costs associated with development are private information for each firm. This environment is susceptible to the formation of a cooperative cartel. We study cooperative cartel of standardization development in the framework of the optimal mechanism design theory when cost information is a private type. Based on the equivalence of the optimal incentive compatible cartel with the Groves mechanisms in the literature, we analyze the environment where there is the Groves mechanism with ex ante fairness and ex post individual rationality; the fair standardization cartel in our context. Specifically, the center of the fair standardization cartel receives the message on the cost information from the firms, and exercises information transmission, standardization selection, and spoil division among the firms with incentive monetary transfers. Our contribution is to use ex post individual rationality condition over endogenous breakdown points of Bertrand price competition in the context where the center is enforced to choose the strategic release of the whole cost information to the members ex post. Additionally, we apply the result to the existence of fair standardization cartels in the recent M&A case of the Korean aviation service industry. When one company,called the main, acquires another company, called a branch, the main as a center could get the cost information of the branch, thus naturally concealing its real cost to the branch when its cost is not the lowest. Furthermore, in a highlighted example of a Bertrand duopoly market with the unit-interval types, we propose that the strategic concealment of cost information by the main due to an M&A decision has reduced the possibility of fair standardization cartels when the density function of costs is symmetric and quadratic. However, the possibility of fair standardization cartels may increase when the market size increases due to the M&A. This theoretical explanation offers a rationale for the positive expectations surrounding the M&A of the two major carriers. Policy makers and industry stakeholders should focus on realizing the market expansion synergies and establishing transparent internal governance to prevent counter-productive information asymmetries.