Collusive pricing patterns in the US airline industry |
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| Institution: | 1. Department of Economics, University of Virginia, USA;2. Department of Economics, UNC - Chapel Hill, USA;1. Department of Economics, Econometrics and Finance, University of Groningen, PO Box 800, Groningen 9700 AV, The Netherlands;2. Netherlands Authority for Consumers & Markets (ACM), PO Box 16326, The Hague 2500 BH, The Netherlands;1. Civil Engineering Department, Universidad de Chile, Casilla 228-3, Santiago, Chile;2. Instituto de Economía, Pontificia Universidad Católica de Chile, Av. Vicuña Mackenna 4860, Santiago, Chile;1. Department of Applied Economics and GIM, Universitat de Barcelona, Avinguda Diagonal 690, Barcelona 08034, Spain & Public-Private Sector Research Center - IESE Business School, University of Navarra, Spain;2. Departament d’Economia and CREIP, Universitat Rovira i Virgili, Avinguda de la Universitat 1, Reus 43204, Spain |
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| Abstract: | We formulate two empirical tests for collusive behavior based on the theoretical insights of Werden and Froeb (1994) and Athey, Bagwell, and Sanchirico (2004). The first predicts that colluding firms will reduce pair-wise differences in prices within a market if demand satisfies certain properties. The second predicts that colluding firms will sacrifice efficiency in production by increasing price rigidity to avoid informational costs. Using panel data from the US airline industry and fixed-effects estimation, we find that greater multimarket contact between carriers leads to pricing patterns consistent with both theoretical predictions, while code-share agreements are consistent with the second prediction. |
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