An Empirical Analysis of the Effect of Multimarket Contacts on Us Air Carriers' Pricing Behaviors

Abstract

A number of empirical studies have shown that multimarket contacts facilitate collusive behaviors between full-service carriers (FSCs) in the US airline industry. This paper empirically investigates the effects of multimarket contacts on air carriers' pricing behaviors and highlights those of low-cost carriers (LCCs) and FSCs as well as those among LCCs. Simultaneous demand and price (pseudo-supply) equations are estimated to derive these impacts of multimarket contacts in the top 30 air markets in the US multimarket contacts among FSCs do lead to collusive setting of high airfares. However, the effect of multimarket contacts is lower among LCCs, and the degree depends on the number of LCCs in a market. The airfares of LCCs remain low, even though there are multimarket contacts among LCCs. These results suggest that the behaviors of LCCs are not affected by multimarket contacts.

Dynamic effect of inter-firm rivalry on airfares: Case of Japan's full-service and new air carriers

“…Fu et al (2011) found that service-differentiation between FSAs and LCCs leads to the cartelized behavior of FSAs. Murakami and Asahi (2011) studied the effect of multimarket contact on LCCs and FSAs and found that LCCs keep their airfares low despite the fact that they frequently have market contact with each other. Zhang et al (2014) showed by estimating the Lernerindex function that Chinese FSAs had market power and that there existed hub-premiums in the Chinese airline market, but the existence of LCCs lowered their market power.…”