Multimarket Contact, Merger, and Airline Collusion

TL;DR

This study examines how multimarket contact and airline mergers influence collusive pricing, finding that frequent cross-market interactions promote collusion, especially for non-stop flights, but mergers do not directly increase collusion among unmerged carriers.

Contribution

It extends previous research by incorporating detailed controls and market measures, and employs an event study with DID to analyze merger effects on airline collusion.

Findings

Multimarket contact correlates with reduced price differences.

Non-stop flights exhibit more collusive behavior.

Mergers do not directly increase collusion among unmerged carriers.

Abstract

This thesis investigates the dynamics of multimarket contact and airline mergers on collusive pricing of airlines. In align with Bernheim and Whinston (1990) and Athey et.al.(2004), it detects collusive pricing via pairwise price difference and price rigidity. The piece of work extends previous work by incorporating additional controls such as distinction between non-stop and stopover itineraries and detailed market concentration measures. The findings confirm a significant relationship between multimarket contact and reduced price differences, indicating collusive equilibria facilitated by frequent interactions across markets. Moreover, the results highlight that airlines exhibit more collusive behavior when pricing non-stop flights, and are more likely to attain tacit collusion when they approaches duopoly in a particular market. The study also explores the effects of airline mergers on collusion, employing an event study methodology with a difference-in-difference (DID) design. It finds no direct evidence that mergers lead to increased collusion among unmerged carriers. However, it reveals that during and after the merger process, carrier pairs between merged and unmerged carriers are more likely to collude compared to pairs of unmerged carriers.