DP9015 Does Multimarket Contact Facilitate Tacit Collusion? Inference on Conduct Parameters in the Airline Industry.

Author(s): Federico Ciliberto, Jonathan W Williams
Publication Date: June 2012
Keyword(s): Airline Industry, Airport Facilities, Collusion, Differentiated Products, Multi-Market Contact, Price Rigidity., Screening Test
JEL(s): L13
Programme Areas: Industrial Organization
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=9015

We show that multimarket contact facilitates tacit collusion in the US airline industry using two complementary approaches. First, we show that the more extensive is the overlap in the markets that the two firms serve, i) the more firms internalize the effect of their pricing decisions on the profit of their competitors by reducing the discrepancy in their prices, and ii) the greater the rigidity of prices over time. Next, we develop a flexible model of oligopolistic behavior, where conduct parameters are modeled as functions of multimarket contact. We find i) carriers with little multimarket contact do not cooperate in setting fares, while carriers serving many markets simultaneously sustain almost perfect coordination; ii) cross-price elasticities play a crucial role in determining the impact of multimarket contact on collusive behavior and equilibrium fares; iii) marginal changes in multimarket contact matter only at low or moderate levels of contact; iv) assuming that firms behave as Bertrand-Nash competitors leads to biased estimates of marginal costs.