The elephant in the room of mutual forbearance

Abstract

Purpose The purpose of this paper is to explain how a multi-market firm develops the motivation to forbear from competition. Design/methodology/approach A two-way fixed effects model with Driscoll and Kraay standard errors investigates the research question with panel data collected from the US scheduled passenger airline industry. Findings The results demonstrate that although the interaction of multi-market contact with strategic similarity impairs a firm’s forbearance from competition, the same interaction promotes it as firm performance deteriorates, supporting the hypotheses. Research limitations/implications Performance explains not only how forbearance emerges out of coincidental multi-market contact but also reconciles the mixed evidence for the impact of the two-way interaction between multi-market contact and strategic similarity on forbearance. Practical implications Antitrust authorities should pay more attention to low performing firms than to high performing firms in their investigations. Also, managers of multi-market firms should identify multi-market rivals with low performance as targets for the initiation of forbearance. Originality/value This study revises the mutual forbearance theory to align it with the accumulating empirical evidence that otherwise refutes its assumption and thereby improves theory’s descriptive and predictive power.