AN EMPIRICAL ANALYSIS OF THE EFFECT OF MULTIMARKET CONTACTS ON US AIR CARRIERS' PRICING BEHAVIORS

A number of empirical studies have shown that multimarket contacts facilitate collusive behaviors between full-service carriers (FSCs) in the US 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. Simultaneous demand and price (pseudo-supply) equations are estimated to derive these impacts of multimarket contacts in the top 30 air markets in the US multimarket contacts among FSCs do lead to collusive setting of high airfares. However, the effect of multimarket contacts is lower among LCCs, and the degree depends on the number of LCCs in a market. The airfares of LCCs remain low, even though there are multimarket contacts among LCCs. These results suggest that the behaviors of LCCs are not affected by multimarket contacts.