Wednesday, October 6, 2010
Does Multimarket Contact Facilitate Tacit Collusion? Inference on Conjectural Parameters in the Airline Industry
Posted by D. Daniel Sokol
Federico Ciliberto (University of Virginia) and Jonathan Williams (University of Georgia) ask Does Multimarket Contact Facilitate Tacit Collusion? Inference on Conjectural Parameters in the Airline Industry.
ABSTRACT: We nest conjectural parameters into a standard oligopoly model. The conjectural parameters are modeled as functions of multimarket contact. Using data from the US airline industry, 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.