Coordinated Capacity Reductions and Public Communication in the Airline Industry

Abstract

We investigate the allegation that legacy U.S. airlines communicated via earnings calls to coordinate with other legacy airlines in offering fewer seats on competitive routes. To this end, we first use text analytics to build a novel dataset on communication among airlines about their capacity choices. Estimates from our preferred specification show that the number of offered seats is 2% lower when all legacy airlines in a market discuss the concept of “capacity discipline.” We verify that this reduction materializes only when legacy airlines communicate concurrently, and that it cannot be explained by other possibilities, including that airlines are simply announcing to investors their unilateral plans to reduce capacity, and then following through on those announcements.

Price effects of calling out market power: A study of the COVID‐19 oil price shock

“…Our findings highlight the signaling role of antitrust authorities in concentrated industries. Indeed, the focus of emerging theoretical and empirical research on cheap talk and public signaling in settings where firms have market power has thus far focused on firms' ability to coordinate on pricing (e.g., Aryal et al, 2021 ; Awaya & Krishna, 2016 , 2019 ). Our results show that nonbinding announcements by governments can also alter equilibrium price paths.…”

“…Borenstein ( 2004 ) and Miller ( 2010 ) study price signaling and coordination among US airlines on an online price clearinghouse in the Airline Tariff Publishing Case. Aryal et al ( 2021 ) document how US airlines signal intentions on earnings calls to coordinate on capacity levels.…”

Facilitating Tacit Collusion Through Voluntary Disclosure: Evidence from Common Ownership

“…A recent article in The Financial Times provides an example of common owners encouraging explicit collaboration among drug manufacturers, albeit not to maximize overall profits but to maximize the likelihood of an effective vaccine. 5 Finally, mangers at commonly owned firms could tacitly collude, resulting in less competition without direct communication or explicit interaction (e.g., Aryal, Ciliberto, and Leyden [2021]). 6 Our study contributes to this literature by examining this third potential means by which common ownership results in anticompetitive behavior and, in doing so, addresses an important open question in the literature.…”

“…As private communication about these topics is generally illegal, firms may use public disclosure instead (e.g., Bourveau, She, and Zaldokas [2020]). 7 Two single industry studies suggest that public disclosure about production quantities and forecasts can aid in coordination across firms (Aryal, Ciliberto, and Leyden [2021], Bertomeu et al [2021]). We examine whether public disclosure increases with common ownership for the purpose of tacit collusion.…”

Empirical Framework for Cournot Oligopoly with Private Information

“…To this end, we build on Vives (2002) and consider a market for a homogenous product with linear and stochastic demand, where firms are asymmetric and have private information about their variable costs. We also allow for a market-level technology shock (observed by the firms, but not by the econometrician) that 1 Private information is also central for anticompetitive practices like limit pricing and predation (Milgrom and Roberts, 1982a,b), collusion (Roberts, 1985) and coordination (Aryal, Ciliberto, and Leyden, 2021).…”