Does multimarket contact facilitate tacit collusion? Inference on conduct parameters in the airline industry

We provide empirical evidence that multimarket contact facilitates tacit collusion among airlines using a flexible model of oligopolistic behavior, where conduct parameters are modelled as functions of multimarket contact. We find (i) carriers with little multimarket contact do not cooperate in sett...

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Bibliographic Details
Published in:The Rand journal of economics 2014-12, Vol.45 (4), p.764-791
Main Authors: Ciliberto, Federico, Williams, Jonathan W.
Format: Article
Language:English
Subjects:
Air fares
Air transportation industry
Aircraft industry
Airlines
Collusion
Cost estimates
Cost estimation models
Equilibrium
Industrial economics
Industrial markets
Marginal costs
Market prices
Market theory
Mathematical independent variables
Oligopoly
Parametric models
Price elasticity
Studies
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Summary:We provide empirical evidence that multimarket contact facilitates tacit collusion among airlines using a flexible model of oligopolistic behavior, where conduct parameters are modelled as functions of multimarket contact. We find (i) carriers with little multimarket contact do not cooperate in setting fares, whereas 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 equilibrium fares; (in) marginal changes in multimarket contact matter only at low or moderate levels of contact; (iv) assuming firms behave as Bertrand-Nash competitors leads to biased estimates of marginal costs.
ISSN:0741-6261
1756-2171
DOI:10.1111/1756-2171.12070