Antitrust & Competition Policy Blog

Editor: D. Daniel Sokol
University of Florida
Levin College of Law

A Member of the Law Professor Blogs Network

Friday, August 24, 2012

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

Posted by D. Daniel Sokol

Federico Ciliberto, University of Virginia and Jonathan W. Williams, University of Georgia ask Does Multimarket Contact Facilitate Tacit Collusion? Inference on Conduct Parameters in the Airline Industry.

ABSTRACT: We provide empirical evidence to support the hypothesis 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 we cannot reject the hypothesis that 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.

http://lawprofessors.typepad.com/antitrustprof_blog/2012/08/does-multimarket-contact-facilitate-tacit-collusion-inference-on-conduct-parameters-in-the-airline-i.html

| Permalink

TrackBack URL for this entry:

http://www.typepad.com/services/trackback/6a00d8341bfae553ef016768a9f08e970b

Listed below are links to weblogs that reference Does Multimarket Contact Facilitate Tacit Collusion? Inference on Conduct Parameters in the Airline Industry:

Comments

Post a comment