Wednesday, August 11, 2010

Does Multimarket Contact Facilitate Tacit Collusion?

Blog readers interested in airline competition issues should make a point to read Federico Ciliberto & Jonathan W. Williams' Does Multimarket Contact Facilitate Tacit Collusion? Inference on Conjectural Parameters in the Airline Industry (Working Paper Aug. 11, 2010) (available from SSRN here).  From the 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.

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