Seminar 4 November, 2013

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

Abstract

We provide empirical evidence that multimarket contact facilitates tacit collusion in the US airline industry using 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 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.

Keywords: Multi-Market Contact, Collusion, Differentiated Products, Airport Facilities, Airline Industry.

JEL Codes: L13.

Contact:
Battista Severgnini and Cédric Schneider