An empirical analysis of the effect of multimarket contacts on air carriers’ pricing behaviors: A case of the U.S.
A number of empirical studies have shown that multimarket contacts facilitate collusive behaviors between full-service carriers (FSCs) in the U.S. airline industry. This paper empirically investigates the effects of multimarket contacts on air carriers’ pricing behaviors and highlights those of low-cost carriers (LCCs) and FSCs as well as those among LCCs. We estimated the simultaneous demand and price (pseudo-supply) equations to derive these impacts of multimarket contacts by using cross-sectional data of the year 2006 (top 30 U.S. air markets with 4484 sample observations). We found that having multimarket contacts among FSCs leads to collusive setting of high airfares. However, the effect of multimarket contacts is lowered among LCCs, and the degree depends on the number of LCCs in a market. We also found that LCCs’ airfares stay at low levels, even though they repeat multimarket contacts among LCCs. These results suggest that LCCs’ behaviors are not affected by multimarket contacts, and that these behaviors have strong impacts on lowering airfares.