MULTIMARKET CONTACT AND MARKET POWER: A CASE OF THE U.S. AIRLINE INDUSTRY

Abstract

Many researchers have empirically shown that multimarket contact has had a collusive effect in the U.S. airline industry. This paper empirically analyzes the effect of multimarket contact on air carriers. pricing behaviors and the impact of market power on multimarket contact. We estimated the simultaneous demand and price (pseudo-supply) equations to derive the impacts of multimarket contact by using cross-sectional data of the year 2006 (top 30 U.S. air markets with 4484 sample observations) . We found that multimarket contact increases airfare and that if there are only full-service carriers (FSCs) in a market, the effect of multimarket contact among FSCs is enforced by their preferrence for collusion. However, if there are low-cost carriers (LCCs) in a market, the effect of multimarket contact is not enforced. We also found that in a market where LCCs have dominant market shares, multimarket contact does not necessarily result in carriers. collusive behavior. These results suggest that multimarket contact affects market performances differently depending on whether an LCC exists.