Multimarket Contact and Capacity: Evidence from the US Airline Industry

Abstract:This study examines the relationship between multimarket contact (MMC) and competitive supply decisions by firms. Using US air-carrier traffic data, we find that a carrier's MMC is negatively associated with the available seats in a market. This finding provides support for the "mutual forbearance hypothesis" and suggests that MMC facilitates tacit collusion in the supply of capacity. We also find that tacit collusion may be more difficult to achieve on longer-distance routes, where carriers face difficulties monitoring the capacities of rivals that compete through indirect routings. On the longer-distance routes, the negative relationship between MMC and capacity thus diminishes. Finally, we show that the negative impact of MMC on capacity has increased in strength over the past 10 years. Since the impact of MMC on reducing capacity may lead to higher airfares, our findings contribute to important antitrust considerations.