DP12730 Coordinated Capacity Reductions and Public Communication in the Airline Industry

Author(s): Gaurab Aryal, Federico Ciliberto, Benjamin Leyden
Publication Date: February 2018
Date Revised: February 2019
Keyword(s): Airlines, Capacity Discipline, Collusion, communication, Text Data
JEL(s): D22, L12, L41, L68
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=12730

We investigate whether legacy U.S. airlines communicated via earnings calls to coordinate with other legacy airlines in offering fewer seats on competitive routes. Using text analytics, we build a novel dataset on communication among airlines about their capacity choices. Our estimates show that when all legacy airlines in a market discuss the concept of \capacity discipline," they reduce offered seats by between 1.14% to 1.48%. We verify that this reduction materializes only when airlines communicate concurrently, and that it cannot be explained other possibilities, including that airlines are simply announcing to investors their unilateral intentions to reduce capacity, and then following through on those announcements. Additional evidence from conditional-exogeneity tests and control function estimates confirms our interpretation.